If you haven't received a payment and you now no longer expect a payment from a delinquent customer, you can apply a bad debt credit to the customer's open sale to close the customer's account.
On the other hand, if you've received a payment but the payment "bounced" you'll first reverse the payment and then apply the bad debt credit.
Click below for the step-by-step procedures:
To use a customer credit to remove a customer's bad debt
To track a bounced payment from a customer
Customer Credits Overview - Using customer credits to remove customers' bad debts