Character.AI has filed for Chapter 11 bankruptcy just five years after launching, following lawsuits and struggles to scale its consumer chatbot platform. In a court document, the company said it had assets and liabilities between $50 million and $100 million. CEO Colin Adams said that after a comprehensive review of alternatives, the board determined that a court-supervised sale process gives the company the best opportunity to maximize value for stakeholders. The startup has also agreed to sell some assets to Disney for $20 million, plus a non-exclusive perpetual license for its technology. Disney will receive transition services from former Character.AI employees who joined the entertainment giant last month alongside former CEO Karandeep Singh Anand. Adams said the platform will keep operating during the sale process, which is expected to close in late November or early December, but noted that there is no bid for the company’s assets yet. If the sale process does not yield an actionable proposal, the platform will be wound down.

Character.AI was founded in late 2021 by former Google engineers Noam Shazeer, a co-author of the Transformer paper, and Daniel De Freitas. The startup initially focused on training foundation models and building a chatbot platform where users could create custom characters. By September 2022, it reached a unicorn valuation through a $150 million raise; the company said users had exchanged more than 2 billion messages in five months and active users were averaging over two hours daily. In May 2023, its apps drew more than 1.7 million installs in their first week. In August 2024, Google struck a $2.7 billion deal to license the startup’s models, and Shazeer and De Freitas returned to Google. General counsel Dominic Perella stepped in as interim CEO, and the company moved away from training foundation models to focus on growth. By October 2024, the platform had 20 million monthly active users.

Legal trouble followed a lawsuit over the suicide of a 14-year-old Florida boy, whose mother said he became obsessed with a Character.AI chatbot. Texas also launched an investigation into whether the platform complied with child privacy and safety laws. The company later settled some lawsuits, added safety features, and banned minors from its platform. In June of last year, it appointed Karandeep Singh Anand, a former Brex and Meta executive, as CEO, and expanded into AI video generation and social feeds. It also introduced interactive storytelling formats and microdramas to spur engagement. The bankruptcy filing shows these changes could not make the company sustainable. Character.AI was one of the top apps in terms of time spent, according to Sensor Tower, but high engagement increases AI costs and raises pressure to monetize users. The company raised over $193 million from investors including Lightspeed, SV Angels, Greycroft, and a16z, according to PitchBook.