Character.AI faces bankruptcy

Character.AI, the company behind a wave of controversial AI companions, declared bankruptcy yesterday.

Its parent company, Character Technologies, has filed for Chapter 11 protection and is seeking a buyer for its business amid what CEO Colin Adams described as “legal, regulatory, and operational headwinds.”

The company also struck a $20 million deal to sell some of its assets to Disney, subject to potentially higher bids from other companies.

Legal troubles
Character.AI has faced a growing number of lawsuits and allegations over its interactions with young users. Kentucky’s attorney general claimed in a filing last week that the platform’s chatbots had advised users to self-harm, starve themselves, or die by suicide, and accused the company of prioritizing engagement over children’s well-being.

Other lawsuits have alleged that the app exposed children to sexual content.

The cases, filed in at least four states, have raised difficult questions about the risks of AI companions for young users. Character.AI and Google agreed to settle the lawsuits earlier this year.

Disney also stepped in, sending Character.AI a cease-and-desist letter in September 2025 demanding the removal of unauthorized AI companions modeled on characters.

Financial pressures have added to the challenge. In its bankruptcy filings, the company cited rising development costs, potential litigation liabilities, and regulatory scrutiny as obstacles to sustaining its business.

What happens now
Character.AI plans to continue operating while the sale process moves forward, with a deal expected by late November or early December.

However, if no buyer offers a viable path forward, the company may shut down the service. For users, the outcome could determine whether their favorite AI characters remain accessible or disappear.