If your client has equity in the property, then a loan modification is something to consider pursuing. Depending on the current mortgage terms, you may be able to get the lender to defer principle payments to the back end of the note to keep the note current...I've had success doing this with clients having a low 600 score...Doing a short sale, or deed-in-lieu is basically giving everything back to the lender including any equity. With a short sale, you can't walk away with any proceeds from the sale. With a foreclosure, technically you could get money back if the lender gets all their due, including fees for the foreclosure, and there is still money left over...highly unlikely in this market. If you have a substantial amount of equity in the property, the lender will more than likely pursue the foreclosure option to get it through a bid up process in the sale. This of course depends on your numbers. If you don't have much equity in the property, a short sale could make more sense for you and for the lender...You have more room for negotiation because the lender will not want to get stuck with the home, or see you get bankruptcy protection to avoid paying them.
But, I'd talk to the lender first about a loan modification (if they want to stay in the home) to get the homeowner through the leaner times, or if that is unsuccessful, pursue the short sale if they are prepared to leave. If they want to maintain the credit they do have, and build it up, they should continue payments or doing a short term loan modification until the short sale occurs. The impact to their credit will be mimimal as compared to pursuing a short while not making payments...The deed-in-lieu is more of a realistic option when there is more equity in the home. If not, many lenders are refusing this option flat out.