Sounds like a timing issue to me. I had that same type of problem (although not as severely as it seems you do) on my Handi Quilter. Service insisted it was timed correctly, but it was constantly shredding the thread. I determined that the machine was actually stitching through the top thread (the needle was piercing the top thread). Was not reproducible with a stationary setup. I finally got lucky - last time they timed it, they must have tweaked a bit in the right direction, and it has been fine (knock on wood) ever since. Now I have the tools to time it myself, next time something goes out.