A short sale involves selling a home for less than what is owed.  In response to the threat of a foreclosure, a short sale is a common overreaction and mistake for the following reasons:

1. You will likely owe the difference.  The lender can sue you in order to recover this difference.

2. If the lender forgives the difference, you might be taxed on the forgiveness of debt that occurs.

3. The credit hit with a short sale is comparable to a foreclosure.

A common better approach is to:

1. File bankruptcy first so that you (a) don't owe the difference and (b) avoid the tax hit).

2. Finish a short sale afterwards.  Many realtors don't realize that this is still possible, and they steer homeowners away from bankruptcy because they don't understand the process.