Legal Question in Real Estate Law in California

The tax consequences of foreclosure versus short-sale are essentially the same, unless the lender collects the deficiency after the short sale. If they foreclose through a trustee's sale they would be prohibited from seeking payment of any shortfall. Unless you have consumer debt you can't handle on top of the mortgage, bankruptcy may not do anything for you. The lien on the house survives the bankruptcy. So the lender will still foreclose once the bankruptcy discharge is isssued, or before if they get relief from stay. Fortunately there is a temporary moratorium on collecting the taxes on the deficiency if the bank walks away from it after foreclosure. I'm not sure it applies to short sales. So you should check with an accountant.