Chris,
Each lender is different in what they will agree to. You will need to contact your lender to find out what documentation they require in order to proceed with a short sale. Most commonly they will ask for a hardship letter (written by you specifying why you need to go through a short sale), current bank statements, pay stubs and prior tax returns.

Chris
It sounds to me as though you need some help. Who is representing you in this sale?

Check out the HUD site below.

A short sale only occurs when the lender (or lenderS) agree to let you sell for less than you owe.

The short fall, called "forgiveness", may be taxable. Legislation passed last December
http://www.irs.gov/individuals/article/0,,id=179414,00.html

allows for the forgiveness to be handled in a special way if the sale meets certain guidelines.

In some sales the holder of mortgage will ask the owner to pay back the forgiveness with a promissory note. It is important that you have a great negotiator on your side who can fight to keep your credit as intact as possible, and minimize other costs for you.

Each short sale is different and each lender is different; consequently there isn't way to give you universal answer to this question. Some lenders will issue a statement saying the debt is forgiven upon acceptance of a short-sale; but even then there is always the possibility that you will receive a 1099 from the lender and will be required to declare the forgiven debt as income on your tax return.

Contact Lender they will instruct you on their procedures YOU need to provide why you can no longer make payments via hardship letter, bank statements and etc. Mortgage company upon review will determine if accept a short sale. In meantime contact a realtor list your home.

Chris- this depends on what is agreed to with your lender when doing the short sale- unless as part of your agreement the remaider is forgiven, then you still owe the money, and they could get a judgement on the seller at a later date- but it wouldnt be at closing, it would be later, most likey when the lender sold the bad debt to a collection company-