Is a Short Sale or Foreclosure Better For Your Credit
I think anyone in the real estate business will tell you that a short sale is better. Both of them affect your credit about the same amount but if you are trying to buy another home you will be able to do so earlier when you have a short sale on your credit versus a foreclosure.
Also, with a short sale you can get away with not having a deficiency balance so on your credit report it shows nothing is owed but with a foreclosure there will be a balance owed.
The article below goes into detail about this and also comments on how it can affect your family http://kcmblog.com/2011/05/04/is-a-short-sale-or-a-foreclosure-my-best-option/