If you're interested in short selling your home to avoid foreclosure and deficiency judgment, you should start with your lender to determine what are the requirements for short selling your home with that lender. Generally, you have to list it as a short sale with a real estate agent for at least 90 days, before the lender considers you for other options. You also have to apply for it, just like you would apply for a loan modification. You can't short sell without lender's approval.
As to the lawsuit, you should respond within the required time, preferably through an attorney, or request an extension of time to respond. If you do not respond, a default judgment may be entered against you, and the foreclosure will happen that much faster.
Please note that the above is not intended as legal advice, it is for educational purposes only. No attorney-client relationship is created or is or is intended to be created by my answer. You should contact an attorney in your area to discuss your case.
Your best bet at this point is to see a lawyer that specializes in foreclosure defense and loan modifications and who can also help you with a short sale. a lot of real estate agents don't want to put a lot of work into trying to sell a home only to find out the real estate has gone in foreclosure--some may if they know that the short sale has been approved. But the legal aspects of these transactions are not something you shold try and do on your own because the are complex and as you might imagine, many of the banks are not going to be as helpful as you thing to you. They want to collect as much as they can which means little or nothing to you.
You need to respond, but also defenses are very important. If you don't bring them up now, you may not get them later. And if you don't have any defenses, then you are missing out on a lot. I am jjust starting up a new website/blog just for real estate and foreclosure defense, because I was mixing a few areas of law on one website and it was probably throwing people off seeing foreclosure defense on a crimnal law website. They are just below. Short-sale is not a defense. If you don't want to talk to me, talk to someone.