A collection demand letter is a document that legally calls for the settling of a debt that is in default. Also called a letter of demand, it should specify the amount owed and payment due date.

What Is a Collection Demand Letter?

Collection demand letter, or debt collection letters, are sent to individuals or companies that have a past-due bill. These letters should be taken very seriously as they can threaten or inform of legal action upon the refusal to pay the debt. Negligence is not an excuse for missing payments.

When borrowing or lending money, the lending party takes a huge risk. Collection demand letters offer the lender some back-up in addition to their loan agreement when it comes to making sure they are repaid.

There are many reasons that could explain why a borrower is not repaying their debt or is making continually late payments. Some possible and common explanations include:

  • A dispute over a specific charge
  • Issues with sending and receiving payments
  • Miscommunication between borrower and lender
  • Forgetfulness

Collection demand letters are a great way to get to the bottom of a payment issue and collect the debt owed.

When to Use a Collection Demand Letter

It makes the most sense to use a collection demand letter when you need to collect missing payments for a loan that is in default. These letters are especially appropriate when more serious legal action is being considered.

Collection demand letters should be very clear and complete to help avoid any further issues or misunderstandings. When formulating a debt collection letter, you'll want to include the following information:

  • Principal loan amount
  • Accumulated fees and interest
  • Total amount due
  • Thorough description of the original reason for the loan
  • Date and location of the original loan disbursement

Templates for collection demand letters are available to help make sure nothing important is overlooked. Such documents should serve two major purposes: informing the borrower of their debt and default and warning of potential legal action. Collection letters should be mailed or faxed with a confirmation of the receipt of the letter so that the document can be used in court as evidence should the issue get that far.

Collection letters can work to motivate a borrower to take their debt more seriously if they aren't realizing the weight of the risk to the lender. They also provide necessary documentation, along with the loan contract, of good faith efforts on the part of the lender if the issue ends up in court.

Sending a collection demand letter should be the first step a lender takes when a borrower defaults on a loan. Verbal arguments and threats do not hold any weight in court and usually do not help a situation. If a lender is serious about getting repaid, their best option is drafting and sending a collection demand letter.

Creditors have some options for making sure that they are repaid for their loans. They can:

  • Bring in a debt collection agency to do their legwork.
  • Send a debt collection letter.
  • Settle for the payment of a smaller amount than the total due.

Important Aspects of a Collection Letter

To help ensure that a collection letter is effective, they should be as clear and straightforward as possible. They should explain the reason for the dispute and state the legal ramifications if the dispute isn't settled. Even small details like using letterhead can help the document be taken more seriously.

Collection letters should be sent as soon as the debt is past-due. Waiting too long in between can cause issues when it comes to enforcing debt repayment.

Using threatening, accusatory, or inappropriate language doesn't do any good and won't help the issue.

The best way to send a debt collection letter is via certified mail. This way the sending and receiving of the letter is all documented.

How to Write a Collection Letter

When drafting a collection demand letter, it is always a good idea to use polite language like "please" and "thank you." Acting professionally can help the debt collection process run more smoothly. Soft tones and clarity are also a must.

Send the collection letter along with the original invoice so that the debt that is being collected is quite clear. Give deadlines and be honest about intentions going forward. If you intend to take legal action, make the borrower aware.

If you need help with a collection demand letter, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.