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A demand letter for payment is a formal notice requesting a debtor to pay an owed amount by a specific date. It serves as a final warning from a collector, signaling potential legal action if payment is not made. The video outlines the importance of sending such letters, highlighting their role in formally notifying the debtor, recording the reason for the debt, specifying the amount owed, and providing a written demand in case of legal disputes. Additionally, it can offer a reduced settlement as an incentive for payment. Viewers will also learn about obtaining a free and official template for creating a demand letter.