I get this question all the time. My answer is a hedge, but it can be a useful hedge.
A short sale can have serious legal, financial, and tax consequences for you which depends on your particular situation. I do not fully know all of your circumstances, and in any case, am not legally qualified to give you an answer that may be appropriate for you.
You need to consult with the appropriate professionals to determine for yourself if the consequences of a short sale are right for you. These may include an attorney specializing in consumer and bankruptcy law, your financial or tax advisor and/or a CPA. If you don't know of or have these trusted advisors, I can refer people to you.
While a 'short sale', which is an agreement by your mortgage lender(s) to accept a payoff of the loan(s) for an amount less than the note amount, seems like an easy answer for a seller who owes more than a home is worth in today's market, it is not that easy to find a buyer for these types of situations. The main reason is that less than 10% of offers from potential buyers who go through a short sale process result in closed escrows. Why? First, banks don't like to lose money, and to generate offers the seller will likely have to heavily discount a listing price, which the potential buyer will likely further heavily discount. Second, the bank requires extensive information that is packaged properly in order to be considered. Most lenders are overwhelmed with applications, and proper presentation will get a timely review. Others just get tossed on the pile.
Once a seller and a potential buyer have reached an agreement 'subject to the lender's approval', the process begins with getting the short sale approved through the lender. This is not easy (remember the less than 10% get approved?), and it takes a lot of time. Many buyers will not go the distance, and if the sellers have other assets, the lenders will want them. Also, many Realtors will not show short sale listings to their clients given alternatives, since the low probability of a successful close of escrow means that there is a lot of wasted time and effort, with no payday.
The hit on your credit is severe and lasts a long time. Many professionals that I have talked with say it is as severe as a foreclosure on your credit. If you have to find a rental to live in afterward, the hit on the credit is so severe that you may find it very difficult for landlords to approve you. You may have to pay the difference between negotiated payoff and the note as taxable income if it is non-owner occupied. You might be tempted to listen to lots of advice and information by uncertified professionals or the media, much of which is misleading or just wrong. You really need to talk with certified professionals about your situation, and not heed advice of well-meaning family, friends, or even a Realtor. The consensus view is that short sales are better than foreclosures, but only if the short sale is approved by the lender(s).
As a responsible Realtor, I would not consider taking a short sale listing until my potential client had consulted these professionals. If a potential client will not take that basic advice in their own best interest, then they will likely not take my advice through the listing period. If we don't have that kind of relationship, then what is the point? They need to find someone for better or worse that they will be able to work with.
As a potential seller in a tough financial situation, you really need to get solid and professional information on how a short sale will affect you and your particular situation. It may be that another option, such as leasing it out either long-term or short term, a lease option to purchase, or deed in lieu of foreclosure may be a better alternative for you. Letting the home go to foreclosure may be what eventually happens if you don't follow your professionals' advice.
There is of course lots of commentary on short sales in the media and on the web for you to consider:
http://www.trulia.com/voices/Foreclosure/Does_the_short_sale_go_on_your_credit_report_-12935--
http://activerain.com/blogsview/452160/Short-sale-does-affect
Just Google whatever combination of 'short sale', foreclosure and credit that you want.
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