If the bank approves the short sale you are not responsible for the balance. By accepting it, they are saying they'll taks less then what is owed. However, you should not expect to receive proceeds from the sale and your credit can still be negatively affected. You may also be responsible for the taxes on the forgiven debt, which currently is considered income by the IRS. There is legislation to change this and you can find out more info on that by checking the link below. In my opinion though, a short sale is definitely better then getting foreclosed.
It depends. Short sales are designed to assist distressed homeowners who have no personal assets they can use to pay their mortgage and keep their home. Occasionally, a lender will allow a short-sale on a property where the owner owns other property, with the stipulation that the forgiven amount becomes a cross-collateralized loan on the other property. Since laws vary from state to state, please consult a real estate attorney to advise you before accepting the bank's short sale approval.
Ian is generally correct, but you should verify with your bank. Most of the time they will forgive the debt you owe, but they are not required to. You should have an understanding with them. He is also correct that it will be looked at as income for you for the amount you wouldn't have to pay back. Consult with your accountant.
Everything Ian has said is correct, except that banks sometimes do request that the balance be paid back in the form of a personal loan. It depends on the bank and what can be worked out. Talk to your tax advisor or cpa. If presented with this option, and is doable by you, it has the least affect on your credit rating.