Secured creditors have a claim over the collateralized asset. During liquidation, sale proceeds of the asset are first used to settle the secured claim. If sale proceeds are insufficient to settle the claim, the shortfall would be treated as an unsecured claim and paid as part of the liquidation proceeds for unsecured creditors.
Hale holds a $30,000 non-interest bearing note, secured by an asset having a book value of $35,000. However, liquidation value is only $5,000, which would be applied to settle the claim. The balance shortfall of $25,000 would be considered an unsecured claim. Given in the problem that unsecured claims are settled at 40 cents to a dollar (i.e. only 40% of the claim is settled on liquidation). Thus, against the unsecured claim of $25,000 Hale would additionally receive $10,000 (i.e. 40% x $25,000). In all, Hale would realize $15,000 from the liquidation proceeds, sale proceeds of collateralized asset $5,000 and $10,000 on settlement of the balance unsecured portion of the claim.