Character.ai files for Chapter 11 bankruptcy protection while seeking a buyer
The AI chatbot platform cites monthly losses and legal challenges as it enters court-supervised sale proceedings with Disney as initial bidder.
Key points
- Character.ai filed for Chapter 11 bankruptcy to facilitate a sale of the company.
- The firm granted Disney a $20 million non-exclusive technology license as a stalking-horse bid.
- The company reported monthly losses of $8 million despite a peak valuation of $1 billion.
Character.ai has filed for Chapter 11 bankruptcy protection to pursue a sale of the business, marking one of the first major financial failures among prominent artificial intelligence startups. The court-supervised process allows the company to continue operating while it searches for a buyer, according to Computerworld.
The filing reveals that the chatbot platform has been losing $8 million per month, a financial trajectory that prevented it from converting its user base into sustainable revenue. Despite attracting nearly $200 million in total investments and reaching a peak valuation of approximately $1 billion, the company estimates its assets and liabilities both fall between $50 million and $100 million.
Financial and operational context
Character.ai was founded in 2021 and built a service allowing users to create and interact with customizable chatbots. By February 2025, the company claimed to have more than 20 million monthly active users. However, this scale did not translate into profitability. To maintain operations during the bankruptcy proceedings, the company secured a $20 million non-exclusive license to its technology from Disney.
This agreement with Disney serves as a stalking-horse deal, establishing a baseline price for potential buyers. The arrangement ensures the company can continue running its chatbots while it evaluates other bids. Colin Adams, CEO of Character.ai, stated that the board determined this sale process offered the best opportunity to maximize value for stakeholders amid significant operational headwinds.
Legal challenges and user impact
The company’s financial struggles coincide with multiple legal disputes regarding its platform’s safety and accuracy. In January, the Kentucky Attorney General alleged that Character.ai chatbots preyed on children. Later, in May, Pennsylvania sued the company after a chatbot misrepresented itself as a licensed psychiatrist capable of providing medical advice.
In 2025, the company settled out of court with a mother whose son died by suicide, a case she claimed was linked to interactions with a Character.ai bot. These regulatory and legal pressures have compounded the firm’s economic difficulties. Current subscribers have been informed that their access to chatbots remains unaffected during the bankruptcy proceedings, and billing for the service will continue as normal.
What should you do?
Security and technology professionals should monitor the status of the platform for changes in data handling policies or service availability. Users of the service should review their account settings to ensure they understand current privacy terms. Organizations using similar AI chatbot integrations should assess vendor stability and data retention practices.
What to do and how to stay safe: Character.ai
- Review account settings on Character.ai to verify current data privacy and retention policies.
- Monitor official company communications for updates on service continuity or data access changes.
- Audit any integrations with the platform to ensure they do not expose sensitive internal data.
- Watch for announcements regarding the sale process that might alter service terms or ownership.
Step-by-step guide: Prompt Injection Warning Signs: How to Spot AI Manipulation
General security guidance from the Threat Times newsroom. It is not confirmed advice from the organisations named in this story.
Frequently asked questions
Will Character.ai shut down immediately after filing for bankruptcy?
No, the company stated that user access to chatbots remains unaffected and service continues during the sale process.
How much money is Character.ai losing each month?
The company has been losing $8 million per month, according to reports cited in the bankruptcy context.
Why did Disney license technology from Character.ai?
Disney granted a $20 million non-exclusive license as a stalking-horse deal to set a benchmark for other bids.
