Your question was duplicated on our site. You can thus find several additional answers to your inquiry via the link below.
You really need to be consulting with a real estate attorney to detail your options for you. A lender is going to want to see proof of financial hardship to cooperate with a short sale, and even then, you may not be off-the-hook for any outstanding balance.
Keep us posted, and I look forward to seeing what others offer. I can certainly align you with the right agent in your area who would handle a distressed property transaction.
My best to you.
This is a really sticky question. There are so many factors in play here. First up, there is no question you should be seeking counsel on this. Bankrupcy, foreclosure, settlements and mold sickness are all huge legal issues that are best left to counsel to guide you through. Trulia is loaded with mortgage and real estate experts, but I doubt any of them can give you the perfect answer. The last part of your question about putting a future home in your sons name will depend on many factors as well (his credit, age, are you gifting him funds, etc.) These questions are best answered via a loan officer, but I would get your legal issues fixed first before I would be exploring your next house. I wish you luck in working this out.