If you let your customers do business with your company on credit, it's always possible some of them won't pay. When you earn the money, you record the payment due in accounts receivable. If the client doesn't come through, you eventually write off the bad debt in your ledgers. In most cases, you won't have to send out Form 1099-C to the customer in arrears.
Unless you're a bank, credit card company or some other company that makes a business of lending money, you don't have to send out a 1099-C. If you fall into one of those classes, you mail out the 1099-C if you forgive a customer a debt of $600 or more. An example would be a credit card company that accepts $8,000 on a $10,000 account and writes off the rest. Other businesses, even those with bad debts, don't have to bother.
Cash or Accrual
If you pay your taxes on a cash basis -- you only report taxable income when you are paid -- your bad debts usually don't concern the Internal Revenue Service at all. With cash-basis accounting, a credit sale doesn't count as taxable income, so when the client doesn't pay, it isn't a taxable loss. If you use accrual accounting for taxes, you can write off bad debts. However, writing off the loss doesn't trigger a requirement for non money-lending businesses to send a 1099-C.
The IRS rules don't forbid other businesses from filing a 1099-C; they just don't require it. If you choose to file a 1099-C after writing off a debt, you can. This is significant because when you formally cancel a debt, it becomes taxable income to the debtor. If a customer and the IRS receive a 1099-C for a $2,000 forgiven debt, you lose any chance of collecting, but the customer now has to pay tax on the money.
Employers or Contractors
If the person who owes you money is one of your employees or an independent contractor, there's more paperwork involved. When you forgive an employee's debt, it counts as added salary, so you have to take into account withholding and adjusting the W-2 form. If an independent contractor performs work for you in return for wiping out a debt, that's income too. Rather than a 1099-C, if it's worth $600 or more, you send out a 1099-MISC for miscellaneous income.