Character.ai, a California startup that has faced lawsuits over allegations that chatbots created on its platform harmed the mental health of teens and led to copyright issues, filed for Chapter 11 bankruptcy.
The Menlo Park-based company runs an app that allows people to create and interact with chatbots who mimic celebrities, historical figures or other virtual characters. Founded nearly five years ago by former Google engineers, the company reached a valuation of $1 billion in 2023 as people flocked to the app for entertainment, roleplay and companionship.
But trouble started to plague the startup as it grew. Parents in multiple states sued the startup, alleging in lawsuits that the chatbots harmed their children, even leading some to take their own lives. The company has said it takes safety seriously and has also rolled out new limits for minors on the platform. Earlier this year, Character.ai and Google agreed to settle several lawsuits filed by families in multiple states, including Colorado, Florida, Texas and New York.
Character.ai has also faced copyright infringement claims about the virtual characters users create on its platform. Last year, the AI startup removed chatbots that impersonated popular Disney characters such as Elsa and Darth Vader after the Burbank entertainment behemoth sent a cease-and-desist letter.
Character.ai said before the bankruptcy filing it struck an agreement with Disney in which the entertainment company agreed to pay $20 million to license certain intellectual property from the AI startup.
In a blog post late Monday, Character.ai said it has “taken meaningful steps to sustain and improve” its “business amid significant legal, regulatory, and operational headwinds.” Filing for bankruptcy will help the company move forward with a court-supervised sale by the end of this year, according to the post.
“We hope that the sale process will yield an actionable proposal that will allow continued operations of the Character.ai platform. If such a bid is unavailable, however, the platform will be wound down,” the company said in the blog post.
Character.ai has been among AI companies that have faced more scrutiny over how chatbots are impacting young people’s mental health. In 2024, Florida mom Megan Garcia sued Character.ai, Google, and its parent company Alphabet after her 14-year-old son, Sewell Setzer III, died by suicide. The teen conversed with chatbots on Character.ai and the lawsuit alleged the company failed to notify the parent or offer help when he expressed suicidal thoughts.
He felt he had fallen in love with a chatbot named after “Game of Thrones” character Daenerys Targaryen, according to the lawsuit.
The high-profile lawsuits prompted California politicians to pass new bills to make AI chatbots safer on the platform.
Character.ai has undergone some leadership changes as it grappled with safety concerns. The company hired Karandeep Anand, a former Facebook executive, as chief executive. Anand left the AI startup this year after Disney hired him as its first chief technology officer.
The company, which has more than 20 million monthly active users, said its chatbot platform will continue to run as usual as it goes through the sale process.
“As we navigate this process, maintaining a safe and engaging user experience for our Character.ai community remains a top priority,” said Colin Adams, chief executive of Character.ai, in a statement.
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