When contemplating drastic action to resolve your financial woes, it is important to consider what you get to keep and what you have to give up.
One of the first things a trustee in bankruptcy does is figure out if you are insolvent. In other words, if you liquidate assets, are you able to pay off some of your debts and still be able to carry on with some comfort in life. If you are deemed to be insolvent, then you relinquish your assets (except your house) for liquidation and the proceeds pay off a certain percentage of your debts. Then, you pay a monthly amount over a certain period of time to make restitution on the balance owing, until your creditors are satisfied with the amount you paid back in relation to what you owed.
This is where the differences between a bankruptcy and a consumer proposal become important. In a consumer proposal, you do not have to liquidate your assets, meaning you get to keep the money in your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) while you make a monthly payment to make restitution on your debts. Creditors decide whether they want to accept your payment plan or not, and as long as you continue to follow the payment schedule, you can keep whatever you have.
In a bankruptcy, you may get to keep your RRSPs (except whatever contributions you made in the 12 months leading up to filing for bankruptcy, and even some of those may be exempt from liquidation) but a TFSA is not protected, meaning the money you have in there will be used to pay off some of your debts.
The difference lies in how the two filings behave. In a bankruptcy, you are basically saying “OK, I’m selling all my stuff and here’s what I am able to give you against what I owe you.” In a consumer proposal, you are saying “Let me keep my stuff and although I can’t pay you everything I owe you, I’ll pay you this much a month for the next five years.”
In a consumer proposal, creditors are getting more from you than they would in a bankruptcy; that’s why many don’t want you to go bankrupt and will likely not contest your proposal, if it’s structured properly.
It should be noted that a TFSA holds no special standing and all your bank accounts will be treated in the same way under both a bankruptcy and a consumer proposal. What a TFSA has done for you, though, is allow you to earn interest without paying tax on it, so over the course of contributing to it, you’ve made money you can then use as you see fit … even if that is to help you pay off your debts.