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Trunk floor pan rubber plug and rust formation. 700 1992

Hi, I have a couple questions about the status of my trunk. I have a 1992 740 Wagon that's developing a Rust problem. The rust is forming right along the back line of the rear passenger wheel well. The picture makes it look as if the top has rusted through, but this is not the case. Also you cannot see it, but I lifted the sound padding, and noticed that the rust does not creep up the fender, but is simply in the seam area of the vehicle. My question is, how can I address this rust problem? If there's enough metal left, can I simply sand it down and paint over it? I assume I'll have to take off the plastic guards in the wheel well to investigate from the outside as well.

Secondly, there's a floor pan plug, with a gaping hole, and a good deal of sand, which looks a lot like New England plow sand to me. My theory is that this stuff is coming up through the hole. I'm not sure if water is as well, but it looks as if it were collecting in the wheel well corner. I thought this rubber plug was supposed to be sealed, until I saw what looked like a little channel in the middle of it. Should these items be sealed, or open to the elements? I had a hole in the driver side plug as well, and simply taped over it. The passenger side did not show any signs of rust thankfully.







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