diff --git a/CHANGELOG.md b/CHANGELOG.md
index 103ad33d1f..d4e243fd0d 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -96,6 +96,7 @@ Ref: https://keepachangelog.com/en/1.0.0/
 - [1330](https://github.com/umee-network/umee/pull/1330) Implemented MaxSupplyUtilization.
 - [1319](https://github.com/umee-network/umee/pull/1319) Implemented MaxSupply.
 - [1331](https://github.com/umee-network/umee/pull/1331) Implemented MinCollateralLiquidity.
+- [1343](https://github.com/umee-network/umee/pull/1343) RepayBadDebt and Liquidate automatically clear blacklisted collateral.
 
 ### Improvements
 
diff --git a/x/leverage/keeper/filter.go b/x/leverage/keeper/filter.go
index 0b1a276c41..864c958273 100644
--- a/x/leverage/keeper/filter.go
+++ b/x/leverage/keeper/filter.go
@@ -24,13 +24,3 @@ func (k Keeper) filterAcceptedCoins(ctx sdk.Context, coins sdk.Coins) sdk.Coins
 		},
 	)
 }
-
-// filterAcceptedUTokens returns the subset of an sdk.Coins that are accepted, non-blacklisted uTokens
-func (k Keeper) filterAcceptedUTokens(ctx sdk.Context, coins sdk.Coins) sdk.Coins {
-	return k.filterCoins(
-		coins,
-		func(c sdk.Coin) bool {
-			return k.validateAcceptedUToken(ctx, c) == nil
-		},
-	)
-}
diff --git a/x/leverage/keeper/iter.go b/x/leverage/keeper/iter.go
index 2fdcc4f444..c521f5bfd9 100644
--- a/x/leverage/keeper/iter.go
+++ b/x/leverage/keeper/iter.go
@@ -232,11 +232,13 @@ func (k Keeper) SweepBadDebts(ctx sdk.Context) error {
 		addr := types.AddressFromKey(key, prefix)
 		denom := types.DenomFromKeyWithAddress(key, prefix)
 
-		// first check if the borrower has gained collateral since the bad debt was identified
-		done := k.HasCollateral(ctx, addr)
-		// TODO #1223: Decollateralize any blacklisted collateral and proceed
+		// clear blacklisted collateral while checking for any remaining (valid) collateral
+		done, err := k.clearBlacklistedCollateral(ctx, addr)
+		if err != nil {
+			return err
+		}
 
-		// if collateral is still zero, attempt to repay a single address's debt in this denom
+		// if remaining collateral is zero, attempt to repay this bad debt
 		if !done {
 			var err error
 			done, err = k.RepayBadDebt(ctx, addr, denom)
diff --git a/x/leverage/keeper/reserves.go b/x/leverage/keeper/reserves.go
index cd42eecb09..2ba7ae0af3 100644
--- a/x/leverage/keeper/reserves.go
+++ b/x/leverage/keeper/reserves.go
@@ -6,14 +6,46 @@ import (
 	"github.com/umee-network/umee/v3/x/leverage/types"
 )
 
+// clearBlacklistedCollateral decollateralizes any blacklisted uTokens
+// from a borrower's collateral. It is used during liquidations and before
+// repaying bad debts with reserves to make any subsequent checks for
+// remaining collateral on the borrower's address more efficient.
+// Also returns a boolean indicating whether valid collateral remains.
+func (k Keeper) clearBlacklistedCollateral(ctx sdk.Context, borrowerAddr sdk.AccAddress) (bool, error) {
+	collateral := k.GetBorrowerCollateral(ctx, borrowerAddr)
+	hasCollateral := false
+	for _, coin := range collateral {
+		denom := types.ToTokenDenom(coin.Denom)
+		token, err := k.GetTokenSettings(ctx, denom)
+		if err != nil {
+			return false, err
+		}
+		if token.Blacklist {
+			// Decollateralize any blacklisted uTokens encountered
+			err := k.decollateralize(ctx, borrowerAddr, borrowerAddr, coin)
+			if err != nil {
+				return false, err
+			}
+		} else {
+			// At least one non-blacklisted uToken was found
+			hasCollateral = true
+		}
+	}
+	// Any remaining collateral is non-blacklisted
+	return hasCollateral, nil
+}
+
 // checkBadDebt detects if a borrower has zero non-blacklisted collateral,
 // and marks any remaining borrowed tokens as bad debt.
 func (k Keeper) checkBadDebt(ctx sdk.Context, borrowerAddr sdk.AccAddress) error {
-	// get remaining collateral uTokens, ignoring blacklisted
-	remainingCollateral := k.filterAcceptedUTokens(ctx, k.GetBorrowerCollateral(ctx, borrowerAddr))
+	// clear blacklisted collateral while checking for any remaining (valid) collateral
+	hasCollateral, err := k.clearBlacklistedCollateral(ctx, borrowerAddr)
+	if err != nil {
+		return err
+	}
 
-	// detect bad debt if collateral is completely exhausted
-	if remainingCollateral.IsZero() {
+	// mark bad debt if collateral is completely exhausted
+	if !hasCollateral {
 		for _, coin := range k.GetBorrowerBorrows(ctx, borrowerAddr) {
 			// set a bad debt flag for each borrowed denom
 			if err := k.setBadDebtAddress(ctx, borrowerAddr, coin.Denom, true); err != nil {
@@ -27,6 +59,8 @@ func (k Keeper) checkBadDebt(ctx sdk.Context, borrowerAddr sdk.AccAddress) error
 
 // RepayBadDebt uses reserves to repay borrower's debts of a given denom.
 // It returns a boolean representing whether full repayment was achieved.
+// This function assumes the borrower has already been verified to have
+// no collateral remaining.
 func (k Keeper) RepayBadDebt(ctx sdk.Context, borrowerAddr sdk.AccAddress, denom string) (bool, error) {
 	borrowed := k.GetBorrow(ctx, borrowerAddr, denom)
 	borrower := borrowerAddr.String()
diff --git a/x/leverage/keeper/validate.go b/x/leverage/keeper/validate.go
index 752468da09..1fb4938894 100644
--- a/x/leverage/keeper/validate.go
+++ b/x/leverage/keeper/validate.go
@@ -19,15 +19,6 @@ func (k Keeper) validateAcceptedDenom(ctx sdk.Context, denom string) error {
 	return token.AssertNotBlacklisted()
 }
 
-// validateAcceptedUTokenDenom validates an sdk.Coin and ensures it is a uToken
-// associated with a registered Token with Blacklisted == false
-func (k Keeper) validateAcceptedUTokenDenom(ctx sdk.Context, udenom string) error {
-	if !types.HasUTokenPrefix(udenom) {
-		return types.ErrNotUToken.Wrap(udenom)
-	}
-	return k.validateAcceptedDenom(ctx, types.ToTokenDenom(udenom))
-}
-
 // validateAcceptedAsset validates an sdk.Coin and ensures it is a registered Token
 // with Blacklisted == false
 func (k Keeper) validateAcceptedAsset(ctx sdk.Context, coin sdk.Coin) error {
@@ -37,15 +28,6 @@ func (k Keeper) validateAcceptedAsset(ctx sdk.Context, coin sdk.Coin) error {
 	return k.validateAcceptedDenom(ctx, coin.Denom)
 }
 
-// validateAcceptedUToken validates an sdk.Coin and ensures it is a uToken
-// associated with a registered Token with Blacklisted == false
-func (k Keeper) validateAcceptedUToken(ctx sdk.Context, coin sdk.Coin) error {
-	if err := coin.Validate(); err != nil {
-		return err
-	}
-	return k.validateAcceptedUTokenDenom(ctx, coin.Denom)
-}
-
 // validateSupply validates an sdk.Coin and ensures its Denom is a Token with EnableMsgSupply
 func (k Keeper) validateSupply(ctx sdk.Context, coin sdk.Coin) error {
 	if err := validateBaseToken(coin); err != nil {