Character.AI has filed for Chapter 11 bankruptcy five years after launching its service for making AI characters and chatting with them. The company cited numerous lawsuits and challenges in scaling the platform. A court document lists its assets and liabilities at between $50 million and $100 million.
In a statement, CEO Colin Adams said the company had worked over the past year to keep its business going and improve it despite legal, regulatory, and operational challenges. He said the board had considered the available options and decided that a court-supervised sale offered the strongest chance to maximize value for all stakeholders.
The company has agreed to transfer some assets to Disney for $20 million and give it a non-exclusive, perpetual license to its technology. Disney will also provide transition services through former Character.AI employees who joined the company last month, including former CEO Karandeep Singh Anand.
Adams said Character.AI would remain in operation while the sale process continued, with a close expected in late November or early December. He noted that no buyer had emerged and no one had bid for the company’s assets.
Adams said Character.AI hoped to receive an actionable sale proposal that would keep its platform running. Without such a bid, he wrote, “the platform will be wound down.”
Character.AI was established in late 2021 by former Google engineers Noam Shazeer and Daniel De Freitas. Shazeer co-authored the landmark Transformer paper. At first, the startup trained foundation models and built a chatbot service for creating custom characters to talk with.
In September 2022, Character.AI reached unicorn valuation after securing $150 million in funding. The company said users had sent its bots more than 2 billion messages in five months, and active users spent an average of over two hours a day on the platform.
After its apps launched in May 2023, they recorded more than 1.7 million installs in their first week. In August 2024, Google agreed to a $2.7 billion deal to license Character.AI’s models, and Shazeer and De Freitas returned to Google. General counsel Dominic Perella took over as interim CEO. Character.AI stopped training foundation models and turned its attention to growth. By October 2024, the platform had 20 million monthly active users.
The company faced a lawsuit after a 14-year-old boy in Florida died by suicide. His mother alleged that he had become obsessed with a chatbot on the platform. Texas soon opened an investigation into whether the service met child privacy and safety requirements. Character.AI later settled some lawsuits, introduced safety features, and barred minors from using the platform.
In June of last year, Character.AI named Anand, a former Brex and Meta executive, as CEO. It also added AI video generation and social feeds to its products, then tried interactive storytelling and microdramas to boost engagement. The bankruptcy filing indicates these efforts did not make the startup sustainable.
The case also points to the difficulty of scaling and monetizing consumer-facing AI products. Analytics firm Sensor Tower placed Character.AI among the leading apps for time spent. But greater engagement can mean higher costs: AI expenses increase as app use grows, putting more pressure on companies to monetize users.
PitchBook reports that Character.AI raised more than $193 million over multiple funding rounds, with investors including Lightspeed, SV angels, Greycroft, and a16z.
