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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, often serving as a final warning before legal action is taken. This video discusses the significance of these letters, emphasizing their role in alerting debtors to potential legal consequences and documenting the payment request. Key points include detailing the exact amount owed, specifying a due date, and providing written evidence in case of future legal disputes. Additionally, a demand letter can be used to propose a reduced settlement offer as an incentive for prompt payment. The video also mentions where to find a free, official template for creating a demand letter.