If the property is foreclosed by the first lien holder, then the second will most likely end up with nothing as the proceeds from the bank foreclosure sale will most likely not be enough to pay even the first, let alone the second. While a short sale will affect your credit score, a foreclosure will be a lot worse.
Good luck to you.
The first answer is correct. Both lenders need to cooperate in order for them to release both liens. However, in many cases, I've seen the lenders actually negotiate with each other, and the lender in first position will actually offer the second a negotiated dollar amount to release their lien, so that the sale can take place, and the first won't need to take the property to foreclosure. It really depends on who the lenders are in this situation. Some are very cooperative, and other are not. Hope this helps.
You have some very sound advice so far.
You might want to read my four part blog on Short Sales and Foreclosures.