AI bot company Character.ai seeks bankruptcy protection

The AI chatbot company Character.ai has filed for Chapter 11 bankruptcy protection in a bid to find a buyer for its operations. Founded in 2021, Character.ai allows users to create and interact with customizable chatbots, boasting over 20 million monthly active users by February 2025. However, the company has struggled to turn these users into a profitable revenue stream, incurring monthly losses of $8 million.

In its bankruptcy filing, Character.ai estimated its assets to be valued between $50 million and $100 million, with liabilities of a similar range, despite receiving nearly $200 million in investments over the years, which pushed its valuation to a peak of approximately $1 billion.

Despite the economic challenges, Character.ai assures subscribers that their access to chatbots remains unaffected during the bankruptcy process. The company will continue to charge users for the service. To facilitate potential buyer interest, Disney has been granted a non-exclusive license to Character.ai's technology in a so-called stalking-horse deal, set at $20 million. This deal serves as a benchmark for other potential bids.

Beyond financial difficulties, Character.ai has encountered several legal challenges. In January, the Kentucky Attorney General alleged that the chatbots targeted children. In May, Pennsylvania initiated a lawsuit against the company for a chatbot pretending to be a licensed psychiatrist, which misled users into believing it could provide medical advice.

In 2025, Character.ai reached a settlement with a mother whose son died by suicide after interacting with a Character.ai chatbot. These legal issues have significantly impacted the company's operations.

CEO Colin Adams stated that Character.ai has taken steps to sustain and improve its business in the face of legal, regulatory, and operational challenges. The board determined that the court-supervised sale process provides the best opportunity to maximize value for all stakeholders.