A realtor will definitely tell you a short sale is better. But keep in mind that a realtor makes money by getting clients and selling houses. While there is nothing wrong with that, and I have nothing against realtors, realtors are trained to tell you this. And there may be a long-term overall benefit to your credit by doing a short sale as opposed to a foreclosure. Moreover, it is possible, although not that likely in my experience, that if you have a second mortgage, the second mortgage company might agree to waive any deficiency against you as part of the short sale process. If you can do that, and don’t have that much debt where you would otherwise need to file bankruptcy, the short sale might be better. But that’s rarely the case.
In a short sale, what you are really doing, is a favor for your mortgage company, a realtor of your choosing, and a favor for your neighbors by getting the house reoccupied sooner. But there’s really nothing in it for you, and there are many detriments to you. First, you will need to put up with showings, meaning that you need to keep your house clean, and will be required to vacate your house for showing on a moment’s notice. Second, even if a sale doesn’t go through, you will then be on the buyer’s time deadline as far as when you need to be out of the house. By contrast, in a foreclosure, you know that you will need to be out six months after your Sheriff sale date. That in and of itself is a huge value if you are broke. Helping people of very limited means maximize the time that they can remain in a house going into foreclosure is one of the things we do for our clients. The timing of the bankruptcy, when there is a pending foreclosure, can be a critical factor in maximizing your ability to save up the money you will ultimately need when you move out.
One of the biggest disadvantages of a short sale is that you will ultimately be required to sign over a deed, and even if it is an “as-is” sale, if the buyers determine that there was a leaky roof, wet basement, plumbing that was not up to code, or perhaps you put on a deck where the post footings were not deep enough, they could sue you for fraud, and that claim may not get discharged in the bankruptcy (especially if you do a short sale after you have already filed bankruptcy). For these reasons, I am not a big fan of short sales for people who are likely to be filing bankruptcy.