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A demand letter for payment is a formal notice to a debtor requesting the payment of an owed amount by a specific date. It typically serves as a final warning from collectors before potential legal action. The video tutorial discusses the significance of sending a payment demand letter, emphasizing that it alerts the debtor to possible legal proceedings, documents the reason and amount owed, and sets a due date for payment. Additionally, the letter serves as written evidence for any future disputes and can facilitate settlement offers. The video also provides information on obtaining a free and official demand letter template.