Character.ai has filed for Chapter 11 bankruptcy after reaching a $20 million agreement to license certain intellectual property to Disney, as the chatbot company seeks a court-supervised sale amid legal and operational pressures. The platform will remain available during the sale process, but the company says it will shut down if no viable proposal emerges to keep it operating.
The Menlo Park, California-based startup outlined its plans in a blog post late Monday, saying it aims to complete the sale process by the end of the year. The Disney agreement was reached before the bankruptcy filing. It covers licensing of certain intellectual property rather than an announced purchase of the entire company; the scope of the licensed assets was not detailed in the available account.
Chapter 11 allows a business to pursue restructuring or an asset sale under court supervision while continuing to operate. A filing does not itself mean that a service must immediately close. For Character.ai, however, continued operation beyond the bankruptcy process depends on securing a proposal that supports the platform’s future.
Founded nearly five years ago by former Google engineers, Character.ai lets users build and converse with chatbots modeled on celebrities, historical figures and fictional personalities. Its appeal spans entertainment, roleplay and companionship. The company reached a $1 billion valuation in 2023 and now has more than 20 million monthly active users.
Its growth has been accompanied by lawsuits from parents alleging that chatbot interactions harmed their children’s mental health, including cases involving deaths by suicide. Those allegations have placed the company at the center of a broader legal debate over the responsibilities of services that offer emotionally engaging AI conversations to young users.
In one prominent case, Florida mother Megan Garcia sued Character.ai, Google and Google’s parent, Alphabet, in 2024 after the death of her 14-year-old son, Sewell Setzer III. Her lawsuit alleged that the service failed to alert her or provide help when he expressed suicidal thoughts. It also described his emotional attachment to a chatbot named after the fictional character Daenerys Targaryen. These were allegations made in the lawsuit, not findings establishing liability.
Earlier this year, Character.ai and Google agreed to settle several lawsuits brought by families in Colorado, Florida, Texas and New York. Character.ai has said it takes user safety seriously and has introduced additional restrictions for minors. The litigation also helped spur California lawmakers to pass bills aimed at strengthening safeguards for AI chatbot users.
Copyright disputes have created a separate source of pressure. Last year, Character.ai removed bots impersonating Disney characters, including Elsa and Darth Vader, after Disney sent a cease-and-desist letter. That dispute concerned the use of Disney’s characters on the platform; the newly disclosed agreement instead involves Disney licensing intellectual property from Character.ai.
The companies also have a recent leadership connection. Former Facebook executive Karandeep Anand, who had served as Character.ai’s chief executive, left this year to become Disney’s first chief technology officer. Character.ai’s current chief executive, Colin Adams, said maintaining a safe and engaging experience remains a priority during the bankruptcy process. For now, the company says users can continue accessing the platform as usual while it pursues a buyer.
Sources: Los Angeles Times, Yahoo Finance, Axios, The Information