It is in rackspace's own interest that you pay off, by sending the bill to the debt collectors they're going to end up with less than if you strike a deal with them, especially if the debt collection process forces you in to bankruptcy.

In whose name is the rackspace account? Corporate? Private? Are you incorporated?

Basically what you have to do is to come to an agreement where you contractually agree to pay them an X amount per month + some interest on the outstanding balance.

Make it clear to them that if they go the debt collection route that they will likely get nothing at all but that if they will come to an agreement with you that they have your word (for what that's worth) to make up for the hole.

How did it get this far?

I'm sorry to hear about the credit card fraud, every time someone here says they'll do their own processing I keep hammering on that, so I'll use the occasion to do it once again: Please do not do your own processing, use an IPSP that has very thorough fraud controls and scrubbing in place or you are very likely to get burned.

As for your lawyers fees, it sounds to me like he'll have to give you a discount.

Your co-founder being 'unreachable' is not very nice, in for the good times together, in for the bad times together, let's hope he turns up and will shoulder his part of the problem.

Kudos for not going incommunicado like your co-founder.