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89 Subaru justy rear wheels locked up

Subaru released a TSB about the rear output bearing locking up if the gear oil in the transmission gets too low. This seems to have happened to me last week when I did a 70mph 360 on the freeway and went in the ditch.
After dragging it on and off the tow truck twice, the rear wheels came loose. It was almost 3 quarts low on gear oil, so i filled it up and drove it home.
There is a severe leak from the rear output seal, which is cracked.
Looking at the pictures, it seems the driveshaft got hot and locked up inside the extension housing, and not the bearing (which is farther inside the housing.)
My question is, can I sand the burr off the driveshaft, replace the seal, and call it good? Or, should I pull the transmission apart and replace the bearings?

There are more problems inside that housing.

Personally, I would pull it out to inspect it. Running 3 qts low may have had other consequences inside the trans. I’d replace the bearing and the yoke. See all that heat discoloration? That has changed the temper on the metal and is is likely more brittle than designed. Not something I would want failing on me down the road and it’s relatively cheap part to R&R. Better look closely at the housing it seized up in as well.

I think you need to start checking salvage yards and eBay because everything in there is toast and full repair costs even for a DIYer will be high.

The heat came from the bearings so they’re ruined.

This might be bad enough to consider an 89 Justy totaled.

The method least likely to cause you grief and or bodily harm down the road is one of the ones above. Me, if this happened to me, at the very minimum I’d take it apart enough to visually inspect that shaft’s corresponding bearing. If it looked ok, dimensions ok, no spalling or distortion, I might well do what you say, return the shaft to the oem shape and surface condition, replace the seal (arrfff arrrfff arrrfff … lol … sorry, couldn’t help be reminded of Tom’s humorous seal imitation) , new transmission fluid, and cross my fingers. I definitely wouldn’t be driving it on the freeway like that though. Just for around town drives 35-40 mph, and assuming you are the only driver.

OK4450 said it perfectly. Everything in the photo is toast except the board.
Metal is hardened and strengthened by treating it to heat, and it’s softened and weakened the same way. Those pretty colors (I love those colors visually) don’t only mean the metal has been overheated, they also mean its grain structure has been altered and very likely severely weakened. Add to that the fact that grinding the burr off does not return the shaft to round, nor does it replace the metal that’s been peeled off, and the whole thing is ruined. The only way to recover it is by smelting.

This might be bad enough to consider an 89 Justy totaled.

A flat tire is enough to total a 89 Justy.

The Justy was available with either FWD or AWD.
Since the OP is discussing a problem with the driveshaft and the rear wheels, apparently his Justy is an AWD model.

Given that reality, if it is possible to simply eliminate the driveshaft, replace the rear wheel bearings, and allow it to operate as a FWD vehicle, that would be a cheap–albeit Rube Goldberg–method of dealing with the problem. Because the book value of the car is so minimal, anything other than a Rube Goldberg approach probably doesn’t make any economic sense, so this is something that the OP might want to explore.

Hey VDC-what a really good idea.

I could be wrong so correct me if I am.
The reason the fluid leaked out is that the rear seal was damaged.
The tailshaft (yoke) needs to be in place to hold the fluid inside.
The bearing damaged is in the trans not a wheel bearing…

That yoke appears to be from the transmission so the trans itself is toasted. I don’t think the car is going anywhere no matter the mode.

I think @VDCdriver 's FWD conversion is a good idea too. Not sure if there would be any unintended consequences though, like wheel sensors getting confused. When I first purchased my truck I took it on a 4WD trip far into back-country in the Colorado mountains, and I made a little error in judgment – well, actually I had no 4WD driving skills – and snapped a u-joint clean off where the driveshaft connects to the rear differential. I look under the truck, the drive shaft is dragging on the ground. I had no spare u-joint, and even if I did I had no tools. But there was a cattle fence off to the side of the road and some spare fence wire was was just sitting there rusting, so used it to hold up the driveshaft while still allowing the driveshaft to spin. Worked fine to limp back to civilization using FWD.

FWD is not going to mean a thing if everything inside the trans case is damaged. The OP states the gear oil was down by 3 quarts and that’s pretty much the sum total of everything in there.

It could also be that the seizure was not completely related to the driveshaft either. With very low gear oil the bearings on the mainshaft are not lubricated. This can lead to those bearings turning blue from heat caused by oil starvation and seizure; something I’ve seen several times with Subaru manual transmissions.
In one particular case the trans seized the mainshaft bearings because it was 1 quart down. Those bearings were royal purple in color when I tore it down.

There’s no way that trans ran 3 quarts down and hot enough to blue the driveshaft yoke and gald it without causing havoc in the rest of the transmission.

Thanks for all the advice. I opened up the rear of the transmission, and the rear output bearing is toast. The other bearings look ok, but I will replace them since I’ve got it apart.
These are all 4wd related parts. I also don’t think I mentioned it’s a manual transmission.
I think the seal failed after the bearing locked up because I check for leaks daily.
I am looking for a spare transmission just in case.

Sounds like you got things under control and on the right track to the solution. Best of luck.