You can find more details elsewhere, but yes, if collateral is insufficient to buy back the assets, the system "owes" dollars it doesn't have.
The "correct" thing to do is stop paying yield and use USD from the yield fund to repay the "owed" dollars, i.e.:
- The short auto-buys and burns as many USD as it can with its collateral at the best price
- In this scenario, that won't be enough USD to cover the position
- The system burns additional USD from the yield fund to make up the difference
Thus the amount of the USD burned ends up equal to the USD that were created when the short position was opened.
I'm not sure if this was actually implemented, or if it was only discussed.