Negative equity on a trade-in cannot be added to the purchase price of another vehicle, the California Court of Appeals has ruled. Dealerships must disclose negative equity in writing on sales finance contracts, reported Automotive News.

Rolling the outstanding debt on a trade-in into the selling price of a new purchase violates state and federal disclosure laws, the court said. It also creates more risk for lenders and overcharges customers for sales tax and license and registration fees, which are based on the cash price of vehicles.

Federal and California laws require dealerships to disclose negative equity, but most states allow dealerships to finance the negative equity, Boston attorney Charles Ognibene told Automotive News. The limiting factor is the credit policies of the banks and finance companies, he said.