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Lenders have options called Loss Mitigation Alternatives such as Loan Modification, Forbearance, Short Sale and Deed In Lieu.  There are also legal avenues that can be explored.

The short answer is - it depends.  To understand the tax consequences of completing a short sale you should always ask a tax consultant or professional regarding your specific situation.  

Another question where the answer is - it depends.  The lender has a right to require that any remaining balance on the loan is paid, even after the sale of the property is completed, but often the lender will waive that right as a benefit to the borrower for completing the short sale.