The best solution from the real estate and credit history point of view, is to do a short sale with the waiver of deficiency. You'll need a realtor with CDPE (Certified Distressed Property Expert) professional designation. The chance of your being able to get this done is really good, because this was a principal residence for your wife's brother. In about 3 years, your wife's credit history will be good again (with other steps to improve it - please read up on credit building or re-building).
However, your wife needs to fill out everything for the short sale in her name only, and, not to have any taxable income after the short sale completion (coming from the difference between what the house will sell for and the loan amount). Her protection will be in "insolvency exemption" - because part of the short sale approval is borrowers' hardship (being broke). This should be discussed in advance with a CPA.
Deed in Lieu (DIL) - is worse than the short sale (although it does let the owners of the property off the hook), but it only works when there is only one mortgage on the property. DIL could have hidden pitfalls, so it should be checked by an experienced attorney (familiar with the potential problems).
Your personal credit history should not be involved as long as you and your wife don't have any joint credit cards. In a few years, this will not an issue (after your wife's credit history restores). You can also have separate bank accounts for now (until your wife's credit improves) as your wife's banking rating could effect yours negatively.
There is also an option of refinancing with the new HARP program (your wife may want to call her lender and find out if this is possible). There is a chance that she could refinance out of the house also, and her brother would receive a principal and rate reduction (if qualified).
Would love help you solve these issues,
Irina Karan, CDPE
Beachfront Realty, Inc.