Note that a short sale will damage your credit report. A foreclosure will remain on your credit score for ten years. There is no credit-score advantage to a short sale over a foreclosure.  A short sale will have the identical effect on your credit report as a foreclosure. The short sale will show up as pre-foreclosure redemption status, causing a 200-300 point drop on your FICO score. A 'Deed-In-Lieu of Foreclosure' will affect your credit-rating just as badly as a foreclosure. 

In short sales or foreclosures discharged debts are considered earnings according to the IRS. In a short sale the difference between the outstanding loan  and what the vender agreed to sell it for will be considered forgiven debt, and you will be taxed on that amount. You can oftentimes negotiate that down to a lower level, but it is a tough process. 

Foreclosure agencies wil, for an upfront fee, will halt your foreclosure. Their fees will cost you thousands and many agencies just take your dosh and let your residence fall into foreclosure. What these agencies do is contact your lender on your behalf and ask for a 'workout'. A workout is a comparitatively simple process that you can do yourself and save thousands in fees.

But beware: two things can happen with a 'workout'; your credit rating can be hammered and/or you can be squeezed for a few extra thousand and then they foreclose on you! Make sure you get good terms and that they're all in writing. 

If you can’t save your dwelling, you can save your credit evaluation by keeping it free of a foreclosure record. 

Many owners assume that if they can't make repayments on their residence their only alternatives are to foreclosure or file bankruptcy. You can cut a deal with your lender. Get a longer term for a reduced monthly payment or get interest-only payments until you get back on your feet, but most of all get good independent advice from government or charitable bodies, not cheesy 'specialists' who prey on the weak.

Depending on the amount of the default and the time lapsed your financier might care to offer you an interest-only deal for a year or two. This should lower your monthly repayment so you can eventually get back 'on track' and stave off foreclosure.  

Negotiate a repayment plan or work with your lender to lower your interest-rate. Don’t screen your calls and avoid your their letters! That is fatal! If you get a date for a court hearing, go there!

The courts will be on your side. They see a lot of hardship cases, and if you can make any kind of case that you can repay the amount owed in due course, they'll give you the chance to do so. If you don't turn up for your hearing your house will be taken from you by default. 

You could get a deal so you can catch up on missed repayments. Maybe you can pay back less than what is presently owed on your mortgage? It's easier for the loan company to cut a deal with you than go through the foreclosure process, especially if you put up a fight about it. As soon as you think you might go into arrears, get out a pen and paper or turn on your PC an write them a letter about it. Keep copies of your correspondence. They're used to dealing with deadbeats so if you deal with them formally and immediately, they have to cut you some slack.

Many people panic and ignore their financial problems. They lost their homes because they're neurotic or scared of dealing with loan officers or the courts. Be brave! You can become their 'squeaky wheel' and they'll give you a chance just to get rid of you.