Character.AI has filed for voluntary Chapter 11 bankruptcy and is seeking to sell the company through a court-supervised process. Disney is the stalking-horse bidder, offering $20 million for some of the company’s assets, not the entire business. Character.AI says the platform will be wound down if the sale fails to produce an actionable proposal that would keep it operating.
In a blog post, Character.AI said it had taken meaningful steps over the past year to sustain and improve its business amid “significant legal, regulatory, and operational headwinds.” The company said its board reviewed the available alternatives and determined that a court-supervised sale offered the best opportunity to maximize value for all stakeholders.
A stalking-horse bid sets a starting offer for selected assets; it does not commit Disney to buying the company. Character.AI estimated its liabilities at between $50 million and $100 million in a court filing. The company hopes the sale will yield a proposal that allows the platform to continue operating. Otherwise, it says, the platform “will be wound down.”
Founded in November 2021 by then-ex-Googlers Noam Shazeer and Daniel de Freitas, Character.AI let users openly chat with a large collection of largely user-generated AI companion bots called “Characters.” It became an early success in the frothy AI market that emerged after OpenAI released ChatGPT, attracting backing from Silicon Valley investor a16z. By March 2023, the startup was valued at more than $1 billion despite having no revenue. Its founders argued that the service would power the adoption of “personalized superintelligence.”
In September 2024, Shazeer, de Freitas, and dozens of other employees left Character.AI to rejoin Google. As part of the deal, Google provided the company with a $2.7 billion lifeline. Shazeer now works at OpenAI.
Weeks later, Florida mother Megan Garcia sued Character.AI, Google, Shazeer, and de Freitas. She alleged that her 14-year-old son, Sewell Setzer III, died by suicide as a result of extensive, deeply intimate interactions with chatbots on the platform. The lawsuit was settled last year. Other families across the United States then brought cases alleging that their children had been abused by Character.AI and suffered psychological harm, physical injury, or death. Kentucky and Pennsylvania also sued the company. Character.AI was the first company to face allegations of psychological harm and wrongful death involving its users; other major industry players are now facing similar claims.
Children and teenagers made up a huge portion of Character.AI’s userbase, though the company claimed its service was safe for teens aged 13 and over. Futurism investigations found severe content moderation problems, including chatbots focused on pedophilia, suicide, self-harm, and eating-disorder coaching. Users also created bots that simulated school shootings, romanticized real mass shooters, and impersonated real child victims of mass shootings. Character.AI even sent Futurism automated emails encouraging continued chats with school-shooter bots.
After lawsuits and mounting safety concerns, Character.AI made sweeping changes. It added parental controls that Futurism found easy to bypass and moved to bar minors from openly chatting with its bots. The company also introduced “scenes,” brief, preset roleplays. Futurism found that some scenes still centered on Jeffrey Epstein, and Character.AI’s userbase disliked the changes.
Futurism’s assessment is that, in trying to make the freewheeling platform safer, Character.AI eventually made it unusable and deeply frustrating for much of its userbase. That points to a difficult tension: the features alleged to have made the service dangerous for some young users may also have helped make it compelling.
The bankruptcy also puts Character.AI’s business model under scrutiny. Despite immense investments and a valuation above $1 billion, the company struggled to do something important from a business perspective: make money. The source argues that this challenge extends beyond the startup, with consequences that could reach the broader AI industry and the American economy.
Character.AI’s founders once envisioned a service where teens could chat with AI versions of Elon Musk and any number of fictional characters, with transformative, personalized superintelligence in everyone’s pocket. For now, the question is whether a buyer will keep the platform running or the court-supervised sale will end with its shutdown.
