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A demand letter for payment is a notice requesting a debtor to pay an owed amount by a specific deadline. It typically serves as a final warning from a collector, signaling potential legal action if the payment is not made. This video covers the significance of sending a demand letter, highlighting that it alerts the debtor to the possibility of legal consequences, records the payment reason, specifies the exact amount owed, and documents the request in writing for future legal reference. Additionally, it can serve to propose a reduced settlement as incentive for payment. The video also mentions where to find a free, official template for creating demand letters.