NEW YORK--A bankruptcy judge on Tuesday cleared MF Global Inc. to pay back 100% of the money owed to its U.S. and overseas commodity customers, a watershed moment in the collapsed brokerage firm's Chapter 11 case.

"I don't know of anyone who thought when the case started that the foreign and domestic commodity customers would be looking at 100% recoveries," said Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan.

James W. Giddens, the trustee unwinding MF Global's brokerage, won approval to allocate about $305 million from his coffers into an account that would pay back the customers by the end of the year. The money is technically considered an "advance," which will allow Mr. Giddens to collect the money later from MF Global Chairman and Chief Executive Jon S. Corzine and other former executives if they lose a class-action lawsuit from customers and investors over their alleged mismanagement of the firm that led to its collapse.

Before Tuesday, Mr. Giddens had recovered 98% of money for U.S. commodity customers and 74% for those trading on foreign exchanges.

Lawyers for Mr. Corzine, along with attorneys representing former No. 2 Bradley I. Abelow, ex-finance chief Henri J. Steenkamp and other top brass didn't object to the customers getting their money back, but did take issue with Mr. Giddens's characterization of the money as an advance that could later be recovered from the executives. Judge Glenn told a lawyer for Mr. Steenkamp that he didn't think the former executives had standing to make an argument about the allocation. The issue for the executives was about whether his ruling would hurt their arguments in the class-action suit.

Mr. Giddens said, "In the opening moments of the liquidation proceeding, it seemed inconceivable that we would even consider the possibility of 100% return of property owed to former customers of MF Global."

When MF Global collapsed into bankruptcy on Oct. 31, 2011, after Mr. Corzine's big bets on European sovereign debt went bad, Mr. Giddens estimated a $1.6 billion shortfall in brokerage customer accounts.

Since that time, however, trustees for both the company and its brokerage business worked to recover money for creditors, and the shortfall is all but gone.

Individual customers of MF Global's brokerage, which is being managed by Mr. Giddens, had already recovered most of the funds that were caught up in the firm's collapse but needed to reach key settlements with the Commodity Futures Trading Commission and others to allocate the rest.

For creditors of the brokerage's parent company, Judge Glenn approved a proposal earlier this year that would pay holders of about $1 billion in MF Global's unsecured bonds between 12 cents and 42 cents on the dollar for their claims, with claims stemming from a $1.2 billion revolving loan recovering between 27% and 80%.

Still, Mr. Corzine, a former Goldman Sachs Group Inc. (GS) chairman and New Jersey governor, is facing multiple lawsuits over the implosion, including the one from the former customers, another from the litigation trust representing MF Global's parent company, and one from the CFTC. Mr. Corzine and other accused executives have denied any wrongdoing.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)

Write to Joseph Checkler at joseph.checkler@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires