Thanks for the response. Assuming I'd stick with the 14-28T Shimano freewheel I'd probably go the spacing route, but the bike is largely unusable with that gearing... so I imagine I will need to switch back to a 12-23T freewheel of some sort... thus eliminating the chainstay/rubbing issue.

I guess my real concern is whether or not a Suntour 12-23T freewheel will work with a Shimano Deore LX 7 speed rear derailleur... And if not, is there another 7 speed freewheel or cassette that anyone is aware of that would? Even if it involved picking up a new wheel set or replacing the existing hub to a cassette setup, I'd be interested in hearing about it.

You're totally right though - sharp bends/kinks in the housings are having something to do with it. To remedy this I ordered some S&S cable splitters, so I am able to completely separate the front and back of the bike when taken apart and not put any stress on the cables by 'folding' the bike thereby putting them through too much stress.