Shortsell - when you sell your home for less than what's owed against it. Many times a lender will take this difference (an amount that you technically still owe) and eat it... which beats paying a lawyer and going through the costly foreclosure process.
You can also talk to your bank about taking a Deed in Lieu of Foreclosure. That's an option whereby you sign over your home to the bank. And they'll accept it in lieu (or instead of) foreclosure. You would no longer be responsible for the mortgage in this situation. It won't hurt your credit as bad as a foreclosure. Sometimes lenders will agree, othertimes, not. In this market, they'll also be strapped to find a buyer themselves.
Filing Chapter 7 wipes your credit clean - but leaves you with 7 to 10 years of "bad credit". After bankruptcy, if you get a credit card or other loan, you'll be charged extremely high interest rates. Once you file Chapter 7, you cannot file again for at least 7-12 years - depending on your situation. Are you married? If your spouse's credit is good, chances are that a Chapter 7 will benefit you if you can ride your spouse's credit coat tails for a few years and keep your credit clean from here on out.
If you shortsell your home, the bank can still technically come after you for the difference. They can take a Judgment against you for the amount still owed. This is something that you need to speak with your lender about. If they will allow the short sell and eat the difference, then you'll want to get that in writing to cover your butt later on.
It also couldn't hurt to hire a real estate attorney to discuss these things on your behalf with the lender. They're probably more apt to bend for a lawyer, than for the average joe.
Real Estate and Title Insurance for over 13 years