I'll try to answer based on what I remember off the top of my head, but it has been a while since I've looked at this stuff in detail (so @xeroc, @dan, or anyone else please correct me if I am wrong).

In the event of a margin call that cannot be fully 'covered/filled' below the 10% short squeeze protection; how is the remaining outstanding BitUSD covered?

If I remember correctly, I believe the margin call acts as a limit order up to that 10% offset price. That means if it isn't fully filled at the time of margin call, it just sits there in the order books until it is filled. If a margin call order sits in the order books without being filled long enough as the collateral price changes, it is possible that the least collateralized short position can become undercollateralized. The moment this happens, it triggers a global settlement for all BitUSD holders at the highest price possible that the least collateralized short position can support. This means smartcoin holders are forced out of their long position into the underlying collateral (BTS in the case of the BitUSD asset) at a price a little less than the price feed. This event should in theory be extremely unlikely to happen (there would likely be enough liquidity in the order books within 10% of the current price to satisfy the margin calls instantaneously) that we call it a "black swan" event.

In the event of a force settlement (collateral is taken from those traders that have the lowest collateral ratio and the bitUSD are used to reduce their debt), am i right in thinking that their BitUSD balance / debt will decrease from this operation?

The conversion happens at the force settlement price, which is typically the same as the price feed (although it can be any percent offset away from it in the shorts favor, and in fact there is a somewhat controversial proposal happening right now to change that offset from 0% to 1% for the BitCNY smartcoin). So the amount of BitUSD being converted (which is ultimately destroyed) in a force settlement is the amount reduced from the debt of the short position with lowest collateral ratio, but then enough of the collateral asset is taken (BitUSD amount times the force settlement price) from that short position to give to the user who requested the force settlement. If the debt amount of the short position with the lowest collateral ratio is not enough to cover the BitUSD amount being converted, then that short position will be fully closed at the force settlement price (and the excess collateral will be given to short position owner) and then the blockchain will move on to the next short position (in order of increasing collateral ratio) to take care of the rest of the BitUSD amount yet to be converted.