Character.ai declares bankruptcy, citing legal and business woes

Character.ai said it has filed for Chapter 11 bankruptcy protection, with its chief executive attributing the chatbot provider’s financial problems to “significant legal, regulatory and operational headwinds.” 

The company said it will continue operating as it seeks to sell its business, and added that The Walt Disney Co. has agreed to pay $20 million for a non-exclusive, perpetual license to Character.ai’s intellectual property.

Character.ai’s financial struggles follow scrutiny and litigation over its technology, which uses artificial intelligence to create custom bots consumers can chat with. In early 2026, Character.ai and Google, which had a licensing deal with the AI company, agreed to settle several lawsuits filed by families who claimed their teenage children died by suicide or harmed themselves after using Character.ai’s platform.

Several states have also sued Character.ai over its technology, with Kentucky Attorney General Russell Coleman alleging in January that its chatbots “preyed on children and led them into self-harm.” In May, Pennsylvania sued Character.ai after one of its chatbots allegedly claimed to be a licensed psychiatrist in the state and provided a “fake Pennsylvania license number.”

In a statement issued late Monday, Character.ai said it believes the company will be sold by late November or early December. 

“After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the company with the best opportunity to maximize value for all stakeholders,” Character.ai CEO Colin Adams said in the statement. “As we navigate this process, maintaining a safe and engaging user experience for our Character.ai community remains a top priority.”

The company said on Monday that its services continue to operate and that subscriptions remain active. 

“If the service changes in a way that affects paid features, we intend to notify subscribers in advance,” Character.ai said.

In a blog post, the company said customer data “continues to be protected under our Privacy Policy.” That policy states that data Character.ai collects from users — including chat transcripts, voice recordings, and images and videos — could be disclosed in connection with a sale or a negotiation to sell the company or its assets. 

“As a reminder, you can delete your account or export your data through the app or the Character.ai website,” the company said.