Character.AI files for Chapter 11 bankruptcy after five years

Character.AI, the platform that lets users create and chat with custom AI characters, has filed for Chapter 11 bankruptcy protection, following a string of lawsuits and struggles to scale its business. In court filings, the company listed assets and liabilities of between $50 million and $100 million.

The startup has agreed to sell some of its assets to Disney for $20 million, along with a non-exclusive perpetual license to its technology. Disney will provide transition services through former Character.AI employees who joined the entertainment company last month alongside former CEO Karandeep Singh Anand, the startup said.

CEO Colin Adams said the company would keep operating during the court-supervised sale process, which is expected to close in late November or early December, though no bid or buyer has yet emerged. “We hope that the sale process will yield an actionable proposal that will allow continued operations of the Character.ai platform. If such a bid is unavailable, however, the platform will be wound down,” Adams wrote.

Character.AI was founded in late 2021 by former Google engineers Noam Shazeer, a co-author of the Transformer paper, and Daniel De Freitas. By September 2022 it had reached unicorn status on a $150 million fundraise, with users exchanging more than 2 billion messages in five months and active users averaging more than two hours a day on the platform. In May 2023, the startup’s apps drew more than 1.7 million installs in their first week on the market.

In August 2024, Google struck a $2.7 billion deal to license the startup’s models, and both Shazeer and De Freitas returned to Google. General counsel Dominic Perella stepped in as interim CEO as the company shifted away from training foundation models toward growth, reaching 20 million monthly active users by that October.

The company was then sued following the suicide of a 14-year-old Florida boy whose mother says he had become obsessed with a chatbot on the platform, and Texas opened an investigation into whether Character.AI met child privacy and safety laws. The company settled some of the lawsuits, added safety features, and banned minors from the platform. In June 2025, it named Anand, a former Brex and Meta executive, as CEO, and expanded into AI video generation, social feeds, interactive storytelling, and microdramas to drive engagement. Character.AI has raised over $193 million in funding from investors including Lightspeed, SV Angel, Greycroft, and a16z, according to PitchBook.

Why it matters

Character.AI was among the most-used apps by time spent, according to Sensor Tower, yet its collapse shows how hard it is for consumer AI products to translate engagement into sustainable economics: rising usage drives up AI costs just as it increases the pressure to monetize users.