The installer was not booted or Windows 7 would see itself as C when booted into it. By incorrectly running it from XP on C you locked out the drive letter so Windows 7 could not claim it at all. It's a common mistake we see here.
You asked how to format C but then later say you have files which you cannot lose on C. Files should be backed up at all times in case of HD failure. Use an external HD, another network computer, DVD's, flash stick or 15gb free storage with each Windows Live ID on Skydrive.
I would back files up now and then use free Partition Wizard bootable CD to rightclick D>Convert to Primary, click OK. Then rightclick on D again to Modify>Set to Active, OK. Now click on the DIsk # to highlight it, from Disk tab, select Rebuild MBR, Apply all steps.
If Windows 7 fails to start at reboot, boot into Windows 7 DVD or System Repair Disk
to run Startup Repair - Run 3 Separate Times
Once Windows 7 starts on its own and its partition holds the System Active flags, you can boot into PW CD again to rightclick C to Delete, OK. Now rightclick D to Resize, slide left grey border to the left to take up the deleted XP space, OK, Apply both steps. You may need to run Repairs again after resizing on the boot sector.
If you prefer to have Windows 7 on C then back up the files and boot the Windows 7 DVD to Custom Install, use Drive Options to delete all partitions and then click Next for installer to create and format your partition. Clean Install Windows 7