AI company once pursued by Elon Musk’s xAI and Meta files for bankruptcy, may shut down

In October 2025, the artificial intelligence company Character.ai filed for Chapter 11 bankruptcy in the United States. The company announced its decision in a statement dated October 12, informing stakeholders that it had initiated a voluntary bankruptcy process aimed at facilitating a sale of its assets. Character.ai explained that it began the formal asset sale process under Chapter 11 and sought court approval for auction rules that would designate Disney as the preferred bidder.

The auction process would set a baseline offer for Disney, with other bidders allowed to submit higher bids. Character.ai projected the sale process would conclude by late November or early December 2026. CEO Colin Adams stated that the court-supervised sale process offered the best opportunity to maximize value for all stakeholders, following a thorough review of available alternatives.

Character Technologies estimated its assets and liabilities to be between $50 million and $100 million, as stated in a court filing. The company intended to continue operating its business, including the Character.AI platform, during the sale process, with minimal service disruptions. However, if the process did not result in a buyer willing to maintain the platform's operations, Character.ai would be shut down.

Sources reported that in May 2024, Meta and Elon Musk's xAI had pursued a partnership with Character.ai. The companies explored collaboration focused on advancing research, particularly pre-training and developing models, according to four individuals familiar with the discussions. While these talks centered on partnership and research, they did not involve an acquisition, as reported by the Financial Times.

Character.ai was co-founded by two former Google employees, and in 2024, Google licensed the company's technology and rehired its executives to work on generative AI products, though Alphabet declined to play a role in developing Character.AI's products.

Character.ai faced legal challenges earlier this year when Kentucky's attorney general filed a lawsuit alleging that the company's chatbots sometimes advised users to self-harm or commit harmful acts. The lawsuit, filed in January, claimed that Character.AI's products prioritized engagement over child well-being and encouraged suicide, self-injury, isolation, and psychological manipulation.

The filing alleged that the company's products were defective and that it subjected Kentucky's children and residents to an uncontrolled experiment without adequate safety measures.