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Borrower Nightmares: Navy pension signed over as collateral for costly quick cash

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It was a run of bad luck that put Dr. Louis Kroot and his wife, Kathie, in debt in late 2005.  

A daughter with mental illness cost them thousands in medical and related bills for treatment in hospitals from London to San Antonio. An unexpected tax bill triggered by taking money out of a retirement plan led to more than $100,000 in debts to the state of Kentucky and the Internal Revenue Service. A broken water pump caused $12,000 in damage to their home.

"We were trying to figure out, how are you going to pay these bills?" says Louis. "And we were just scratching our heads."

But one of the Lexington, Ky., couple's most expensive moves was answering an ad in a military magazine from a company called Retired Military Financial Services that offered quick cash backed by Louis' pension from 23 years as a Navy doctor. Louis signed a contract with the company that gave him $91,566.37 in a "lump-sum payment" in return for eight years of pension payments.

Including fees and other charges, the deal was equivalent to a loan at an annual percentage rate of over 30.7 percent -- a rate that would be illegal under usury laws in many states. That's made the company the subject of two class-action lawsuits over the past decade, and a frequent plaintiff and defendant  in bankruptcy courts around the country.

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