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A demand letter for payment is a notice requesting payment from a debtor for an owed amount, specifying a due date. This letter serves as a final warning and is often used by collectors before pursuing legal action. The video discusses the significance of sending a demand letter, as it alerts the debtor to potential legal consequences and provides a written record of the payment request, including the exact amount owed. It can be essential in case of legal disputes, and may also be used to propose a reduced settlement as an incentive. Additionally, the video offers information on obtaining a free and official template for composing a demand letter.