You've already done the things I would try. Next I think I would rethread it with different thread and sew on some scrap material and see if it's still having a problem. That might give you an idea of where the problem lies. Try changing the bobbin, too.
As far as the project, since it's a wall hanging ... is it going to be washed? If not, could you just keep the letters glued on instead of sewing them on? If the machine is only having problems with this particular task, you might want to just hand sew them on, since that might be quicker than dealing with this problem. I'm just suggesting these things because you're understandably frustrated and they could help put the whole thing behind you sooner.
