I found an electrical outlet hidden behind wood paneling. Do I need to cut the paneling and remove the outlet?
It's definitely a code violation, boxes have to be accessible without cutting the wall finish - paneling in this case.
The main problem with a buried junction box is that there's no way to know that there's a splice there when troubleshooting and there's no way to inspect the work inside.  Splices are common failure points and if the splice goes bad, it's a real pain to find and fix.  And a bad splice can definitely heat up, so it's a fire hazard.
Think about this:  even if inaccessible junction boxes were code compliant, would you trust those boxes in your wall?  I personally wouldn't trust either, not the one that's dangling nor the one that's attached to the stud.  None of the cables are strapped down, and I don't see any clamps where the cables enter the boxes.  Who knows what kind of dumpster fire might be inside those boxes.
So I'd say just bite the bullet and fix it.  If I am following the photos, you have three choices:

Eliminate the dangling box - replace the cable that feeds these with one long enough to land right in the bottom receptacle box.  (This could be a lot of work.)

Use a NM splice repair kit.  These do appear code compliant, they have a listing for repairs and don't have to be accessible.  Unfortunately they are junky and make an insulation displacement splice and I just don't trust them.

Redo that dangling box so it's accessible.


So I'd probably be going with that last option, it is not much work.  You'd just remove that dangling box, set a box on the stud, and staple down the cable coming down into it.
It looks like there's enough cable to reach a box set at switch height.  Even though it will just wind up with a blank cover, it will look better at switch height than at some random height.  Add a short cable from that box to the receptacle below, also secured properly, splice, button everything up, and hang a picture over the blank cover.