Short and sweet, if you are the legal owner of the house; yes you can rent it out. Please disclose to any tenant that their stay may be interrupted by the foreclosure. Many people have stopped making payments, but remain in their house until they either get the loan modification, complete a short sale or foreclosure. I'm not an attorney and I'm not advising this to anyone, but these options should be considered.
My initial reaction is that you've gotten some pretty bad advice up to this point. For instance, whoever told you that a short sale and a foreclosure are the same from a credit standpoint was wrong. You should have pursued a short sale.
A bankruptcy can stop the required monthly payments, as Scott explained. And, depending on the nature of the bankruptcy, the whole idea is to allow you to restructure your debts. So bankruptcy really is good if you're planning on remaining in the house and hope to save it. At the very least, it's designed to buy you time. It still might be necessary to give up the house at some point, but I think whoever suggested that you walk away during the bankruptcy gave you poor advice.
I'm going to give you some non-legal advice you don't want to hear: Talk to an attorney. But if your previous attorney was giving you the bad advice, find another one. Then tell your attorney you are done with it. Don't worry about the house. Yes, it'll fall into disrepair. But unless there's some reasonable way of you getting back into the house (and from your question and follow-up comments it sounds like there isn't), it's over. It's done. Finished. You've lost the house. Don't risk getting into more trouble by renting out the house (which might get you into some legal trouble). Don't rent it to a friend. You may not have the authority to do so, if there's a bankruptcy trustee. Yes, you're still the owner, but you give up some of your rights (such as disposing of property in a bankruptcy proceeding) when you file for bankruptcy.
And it'll get mucked up further with you establishing rent, but perhaps giving a discount if your friend does maintenance on it. It'll get mucked up when your friend comes to you and tells you that there's some $2,000 repair that needs to be done and she needs you to pay it. It'll be mucked up when the bank starts moving on the foreclosure again. And there are other pitfalls, too.
Walk away. Just walk away.
That's not the advice I'd have given you initially. But the situation looks unsalvageable. Technically, you still may own the house. (Are you even sure of that?) But you haven't paid the mortgage since February. You walked away in July. And I'm not sure how converting to a Chapter 7 would "get the house out of our names."
It's over. It's done.
Move on to the next stage of your lives.
Why did you move out? Most people would just live there for free for as long as they could.
To rent it out and keep the money could be damaging to your bankruptcy case it smells like fraud so I would say don't do it.
For those of you who wondered why we did not remain in the house, mortgage free, well... as silly as this might sound, it was too depressing. The state of limbo was driving us crazy. In addition, we have farm animals and, knowing we would have to rent, jumped on a unique rental situation that allowed us to keep our animals. The rent is also low enough that we can get back on track financially.