In Lancashire it means someone who either has mental illness or impaired capacity for other reasons. The allusion is to the traditional rag and bone man who collected rags in exchange for small trifles such as a jam jar or a balloon. If you were pots fer rags (pots for rags) you would do the reverse of the common sense expected approach.
Describing somebodywho is poor. Additionally, it can be used to describe anything that is poverty-stricken.
1) Look at that guy's jacket, he's totaly pots and pans
2) She broke up with him because she could not take his pots and pans lifestyle
3) Damn nigga it's pots and pans up in this bitch!
Pots and shit refers to whenever something goes terribly wrong. It is referenced to whenever someone jumps out of a plane in a cartoon, but instead of a parachute, pots and shit come out of the bag.
Someone brings you their child to watch because they've got a date and you don't. That's a Pots and Shit moment.