Character.ai seeks bankruptcy protection as Disney lines up bid for assets

Bankruptcy filing and sale plans

Egypt Independent reported that Character.ai has filed for Chapter 11 bankruptcy amid claims linking its app to mental health issues and suicides among teenagers.

The company lets users exchange messages with chatbots modelled after celebrities, fictional characters or creations of their own, and the bots often reply with human‑like conversational cues, inserting references to facial expressions or gestures.

Character.ai said it intends to pursue a court‑supervised sale by the end of the year in order to keep the platform operating in the long term.

Disney bid and leadership changes

Disney has positioned itself as a bidder for the company’s assets, agreeing to pay $20 million for certain intellectual property and to supply transition services through former Character.ai employees it has hired.

This arrangement would allow the platform to remain operational at least during the bankruptcy proceedings.

Karandeep Anand, who was appointed Character.ai’s chief executive last year to help improve its safety reputation, joined Disney as chief technology officer last month.

Legal challenges and safety measures

In 2024 Florida mother Megan Garcia sued Character.ai, alleging that the platform was responsible for the suicide death of her 14‑year‑old son Sewell Setzer III.

Other families filed additional lawsuits accusing the service of providing sexual content to children or encouraging suicide, self‑harm or violence.

Character.ai agreed to settle five of those cases, including Garcia’s, earlier this year.

Matthew Bergman, founder of the Social Media Victims Law Center which represents several of the families that sued Character.ai, declined to comment on the bankruptcy filing.

In response to the litigation the company introduced safety pop‑ups that direct users to mental‑health resources and blocked users under 18 from engaging in back‑and‑forth conversations with bots, limiting them to creating one‑time stories or videos.

Founders, funding and market context

Former Google AI researchers Noam Shazeer and Daniel de Freitas launched Character.ai in 2021; both have since returned to Google.

Within just over a year the company said it had reached a $1 billion valuation after a $150 million funding round.

The bankruptcy filing shows Character.ai holds between $50 million and $100 million in assets.

The firm also faced a safety‑practices probe by Senate Democrats last year, alongside other AI “companion” applications.

It competes with larger chatbots such as ChatGPT and Google’s Gemini.

When Anand took over as chief executive of the then‑70‑person company last year he told CNN he saw a future for the business in interactive, personalized AI entertainment where users could co‑create stories and conversations with AI characters for fun.

He told CNN at the time that the company was “doubling down on entertainment, doubling down on trust and safety.”

Character.ai warned that if a sale is not completed the platform will be “wound down.”

Colin Adams, chief executive of Character.AI, stated: “Over the past year, Character.ai has taken meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds,” adding that the board reviewed its options and “determined that this court‑supervised sale process provides the Company with the best opportunity to maximize value for all stakeholders.”