Two Properties - one with first mortgage, one with first and

[Mike]

Hi,I have two properties that have seriously devauled in AZ. The worst is my townhouse, on which I owe $111 to the first with SunTrust and $30K to a HELOAN with Bof A. Nothing is selling in that complex except for the REOs, which are selling for about $75K. I have put it on the market for $125K, which, after commissions and buyer incentives, will cover the first but not the HELOAN. I haven't had any serious inquiries, and I am not certain where I will come up with the difference, to be honest. This was my primary residence for 2 1/2 years. I moved out in October. I had a renter in there, but he destroyed the place. I have spent thousands of dollars fixing it up so it can be rented or sold again. I can rent it for $750, which will stil leave me in the hole $500/mo.The second property is the house I am currently living in, which I bought in October 2007. I owe $163K, I'd be lucky to clear $140K. I could rent it for $850, which would leave me about $500/mo in the hole. I haven't tried to rent or sell this property.I am current on all payments, but have bled my savings dry. I have good credit (720). I hate to trash it, but I can't go on like this. In addition to the above, I owe $10K on my car, $25K in credit card bills from an unexpected medical problem that left me with no income for 6 months (also the reason for the HELOAN), and $160K in student loans. I make $120K/year now, should go up to $130K in October. Basically, I am wondering what option will be the least destructive in the long run. Chapter 7 isnt an option with my income. Chapter 13 would be. But they would undoubtedly have me on the plan for 5 years, then I'd have a BK on my credit report for another 10 after that. Student loans aren't dischargeable, of course. I'd ride through the car anyway, since I need it. The credit cards would be gone. I'd probably give up both houses and rent. No deficiency judgment to worry about, if one applies in AZ on my HELOAN.Foreclosure would be the next most negative, if I understand correctly, and on my report for 7 years after the sale. I think, with the HELOAN with B of A on the townhouse, I would have a hard time negotiating either a short sale or a deed in lieu. Any thoughts? Also, I am not certain, does AZ have anti-deficiency laws that cover HELOANS, or only purchase money mortgages?? If I am going to trash my credit, I hate to have to pay the $30K HELOAN.I think I could try for a short sale or deed in lieu for my house. It's in a nice neighborhood, a cute place. But still, nothing is selling.My final questions are-- is it possible to negotiate as part of the short sale that the creditor does not report the deficiency 1) to the credit reporting bureaus at all and 2) not report it as taxable income? And, how can I determine if I qualify for relief for taxation of the deficiency under the law President Bush signed last year?Thank you so much in advance for your thoughts - I cant sleep at night.Robin