"was told check on Schedule C; an entry under "Returns and allowances, ".

For a cash basis entity, and especially when reconciling sales tax reporting to income tax reporting, I would offer an example:

You sell some auto part for $100. You give a 5% discount/rebate for the old part which gets sent to a recycler or rebuild shop.

"My client supposed to get a 1099-NEC at the end of the project."

Only for what they got paid, and only from that business which paid them $600 or more. If that client stiffed them, they won't get a 1099-NEC from them.

And that's not the income reporting requirement. It's informational. Your client reports all income from all clients. If a bunch of private clients pay over $1 million each, no 1099-NEC is required. Your client still reports all of that income.

"Ipso facto he is a contractor"

We could not tell from the initial wording "Employer Filed For Bankruptcy" because this was a customer or client, not an Employer. It helps to be correctly and definitively stated.

"It boggles my mind though, that three months' work, is just going to be whipped out and gone and nothing can be deducted on the return."

If your taxpayer client has employees, their labor is an expense. All materials and costs to do the job are business deductions. A Self-Employed Sched C person has no value to their business for their labor, according to the tax regulations. And this is why you get a deposit or prepayment, and try to set up your contract with progress billing, if it takes that long.

And I guess you've never been stiffed by a client for payment? It took me nearly 1 year of chasing a client, to get paid. My father (a Lacerte user) died with probably 4 clients still owing, mostly from one family, and I never collected on that for him.