Updated from April 23

Four months ago, bankruptcy reform was all but dead on Capitol Hill, with congressional attention focused on the war on terrorism and the

Enron

scandal.

But, ironically, Enron's bankruptcy, one of the forces that nearly derailed the bill, is a major factor behind it getting back on track. On Tuesday evening, a panel of House and Senate lawmakers reached a breakthrough compromise on a key sticking point in the passage of legislation -- the homestead exemption.

In five states -- Texas, Florida, South Dakota, Iowa and Kansas -- bankruptcy filers can shield an unlimited amount of home equity from creditors under a homestead exemption. In a post-Enron era, such a loophole that favors more established workers over junior employees has become increasingly unpopular.

The House and Senate agreement combines elements of both bills to eliminate or curb use of the provision. The homestead exemption will be capped at $125,000 for convicted felons, or persons with debts related to a violation of securities laws in the past 10 years. The agreement also creates a 40-month residency requirement to qualify for the unlimited exemption, thus preventing debtors to relocate to one of the states where the exemption exists.

The compromise, drafted by Democratic Sen. Herb Kohl of Wisconsin, was inspired by Enron. "Under the homestead exemption in Texas law today, for example, Ken Lay of Enron infamy could file for bankruptcy and retain his $7 million penthouse apartment and shield it from his creditors, who include Enron employees and investors in Enron stock," said Senate Judiciary Chairman Patrick Leahy, D-Vt., in a statement.

Most of the differences between the Senate and House bankruptcy reform bills have been ironed out, but one controversial hurdle remains. In the Senate version of the bill, there is a provision that would prevent those convicted of committing violent crimes outside abortion clinics from using bankruptcy to discharge their fines.

Democrats, led by Sen. Charles Schumer of New York, support the measure, which is opposed by abortion foes. "We only have the one issue left to work out," says Jeff Lundgren, spokesperson for the Senate Judiciary Committee Press Office.

Tuesday evening's compromise on the homestead exemption brings the bill one step closer to passage -- something that seemed unlikely four months ago. In an election year, plagued by a recession, the bankruptcy reform bill had little support among politicians who didn't want to be associated with harming debt-strapped voters and helping affluent credit card companies. Indeed, the bill would make it easier for credit card companies to seize debtor assets under bankruptcy.

Passage of the bankruptcy reform bill would be the most significant bankruptcy code overhaul in more than 20 years. Under the bill, bankruptcy filers would be subject to a means test to determine whether they can file for Chapter 7 protection, which allows the discharge of most debts, or Chapter 13, which doesn't discharge debt and creates a repayment schedule.

Supporters say this measure will ensure that the needy can continue to use bankruptcy protection, while forcing the more affluent to pay up. Detractors argue that credit card companies and banks have extended credit to low-risk borrowers and shouldn't deny them bankruptcy protection.

Passage would mark the end of a turbulent 13-month journey for this legislation.

Both bills received large support from the House and Senate in March 2001, with the House bill passing 306 to 108 and the Senate bill passing 83 to 15. The initial conference committee meeting was set for Sept. 12, but was postponed after terrorist attacks shut down Congress. A single bill never emerged during November's rescheduled meeting, and with no second meeting date set, many, including supporters, assumed the bill was dead.

But thanks to the Enron effect and constant negotiation, it seems the bill has regained its strong initial support. "There was always a bit of favorable wind for this legislation," says Ed Yingling, executive director of government relations at the American Bankers Association.