I'm thinking that if a cache is in a homeless camp, it should be reported to the Groundspeak folks who review caches before publishing them. Is there a reporting process for this type of thing?
I would bail on any search as soon as I see an issue with the location. High crime areas, unsanitary conditions such as hypodermic needles, used latex gloves, human feces, etc. are inappropriate places to hide caches. It's just not worth a smiley, and I definitely wouldn't take a child into any of these situations. Also, I would make a log entry with details like this to warn others who would appreciate this kind of info.
Yes, everyone should pick up trash, or make an effort to remove some of it. Any little bit helps. If germs gross you out, wear gloves or use another trash bag over your hand to pick it up. Not only that, but caches have a ton of grime inside sometimes. What's the difference?