Character.AI files for Chapter 11 bankruptcy after five years

Character.AI, the startup that lets people create and chat with AI characters, has filed for Chapter 11 bankruptcy protection just five years after its founding. The company listed assets and liabilities between $50 million and $100 million in its court filing.

CEO Colin Adams said the board decided a court-supervised sale was the best way to preserve value for stakeholders after a year of legal, regulatory, and operational pressure. Character.AI 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 also get transition help from former Character.AI employees, including former CEO Karandeep Singh Anand, who joined Disney last month.

The company says it plans to keep operating while the sale process plays out, with a close expected in late November or early December. Adams was blunt about the uncertainty ahead: there is no confirmed bid yet for the company’s remaining assets. If none materializes, he said, the platform will be wound down entirely.

From unicorn to bankruptcy court

Character.AI was founded in late 2021 by Noam Shazeer, a co-author of the Transformer research paper that underpins modern AI language models, and Daniel De Freitas, both former Google engineers. The platform took off quickly: by September 2022 it had raised $150 million at a unicorn valuation, with users exchanging more than 2 billion messages with its bots in five months.

Growth continued through 2023 and 2024, including 1.7 million app installs in a single week after a May 2023 launch and 20 million monthly active users by October 2024. But that same year, Google struck a $2.7 billion deal to license Character.AI’s models, and both founders returned to Google. General counsel Dominic Perella became interim CEO as the company shifted away from building its own foundation models toward growth.

The platform then faced a wave of legal trouble. It was sued over the suicide of a 14-year-old Florida boy whose mother said he had become obsessed with one of its chatbots, and Texas opened an investigation into whether the platform met child privacy and safety laws. Character.AI settled some lawsuits, added safety features, and barred minors from the platform. Anand, a former Brex and Meta executive, took over as CEO in June of last year and pushed into AI video generation, social feeds, interactive storytelling, and short-form “microdramas” to drive engagement.

None of it was enough to keep the company solvent. According to analytics firm Sensor Tower, Character.AI ranked among the top apps for time spent, but that engagement cut both ways: more usage meant higher AI computing costs, which raised the pressure to turn a profit. Character.AI had raised more than $193 million total from investors including Lightspeed, SV Angel, Greycroft, and a16z, according to PitchBook.

The case adds to a growing list of signs that consumer chatbot products are difficult to monetize even with large, engaged audiences. What happens next depends on whether a buyer emerges for the platform during the sale process; without one, Character.AI says the service will shut down.