It really depends on how big of an area and the degree of damage to the existing walls. I try to keep what's up there and patch it if I think that's the faster way to fix the wall. I know that if I put in new sheetrock, I have to feather all the edges and build it up to blend it to the exisisting wall, and that's three days drying time.
For the really bad areas, or if you want the best results possible, prime the exposed gypsum with a good quality primer. I like Zinsser 123 for sheetrock. It soaks in and locks it all together. Then it gives you a solid base to work from when adding your mud. I buy the lightweight stuff in the box with the blue trim. It sands the easiest.
I mix a cup of water into the box. I prefer box over buckets. It's cheaper and easier to work with. I never save any left over mud because it starts to smell bad fairly quickly and it's cheap enough to always buy new for each job. First coat is just to seal the tape and start the build up. Second coat gives me the level that I want. I sand after the second coat so I know where to work the third, and hopefully, last coat. Then I sand the third coat and texture.
The best sand paper is at Home Depot. I like the most aggressive paper I can find, and I like to change sheets as soon as I have to start putting effort into the sanding.
Be sure to use a straight edge, or 6 ft level to see where the high and low spots are. Use a pensil to mark those areas so you don't forget where they are.
Same thing with new sheetrock, except be sure to cut out the texture and a layer of paper on the existing wall so that when you put your tape down, it will be flush with what is already there. I only use fiberglass tape.
Good luck,
Eddie