Short Sale > Foreclosure.
For the items outlined above, the bank is absolving you from any extra balance left after the sale with a short sale.
Banks are willing to wheel and deal these days, they don't want foreclosures anymore than the owners do. Definitely contact the bank, tell them of the situation and see what options are out there. With recent turns in the market, you could easily get a reduced rate and a lower payment. Don't underestimate renting, if you can come close to price of the mortgage payments (~$300 or less of the balance) it would definitely be something to consider.
Sorry to hear about the situation, but I hope it all works out.
