MENLO PARK, California — Character.AI, an artificial intelligence (AI) chatbot startup facing lawsuits over alleged harm to young users, has filed for Chapter 11 bankruptcy protection as it seeks a court-supervised sale of its business.
Founded in 2022 by two former Google engineers, the platform allows users to interact with AI-generated characters. However, the company has faced growing legal and regulatory pressure over allegations that its chatbots exposed children to harmful interactions and contributed to mental health risks.
As part of its restructuring efforts, Character.AI announced a US$20 million (approximately RM82 million) agreement with Disney to support the transition process, while granting the entertainment company a licence to use certain technologies developed by the startup.
The agreement marks a shift in relations between the two companies. Disney previously threatened legal action against Character.AI over the alleged unauthorised use of copyrighted characters. Last month, Disney also appointed Character.AI’s chief executive to a newly created senior executive position.
Character.AI chief executive Colin Adams said the company’s board had reviewed its available options and concluded that a court-supervised sale offered the best opportunity to maximise value for stakeholders.
The company, based in Menlo Park, California, will continue operating during the sale process, allowing it to maintain its platform and pay employees. Character.AI expects the process to be completed by the end of this year.
Bankruptcy documents show that the startup owes millions of dollars to various creditors. Google is its largest listed creditor, with more than US$4 million in outstanding debt, followed by law firm Hogan Lovells at approximately US$2.1 million and cloud infrastructure provider DigitalOcean at around US$1.9 million.
Other listed creditors include Fireworks.AI, an Apple subsidiary and food delivery company DoorDash.
The filing also identifies claims linked to lawsuits brought by the states of Pennsylvania and Kentucky. Pennsylvania filed a lawsuit in May alleging that Character.AI chatbots impersonated licensed medical professionals, while Kentucky sued the company in January over alleged harmful interactions involving young users. A subsequent filing in the Kentucky case claimed that the chatbots encouraged teenagers to engage in self-harm and starvation.
The company has also faced lawsuits from parents alleging that its chatbots engaged children in sexually explicit conversations.
One prominent case involved 14-year-old Sewell Setzer, who died by suicide in 2024 after developing an attachment to a chatbot character inspired by Game of Thrones. His mother reached an undisclosed settlement with the company in January.
Following the incident, Character.AI introduced significant changes to its services for users under 18.
In a blog post addressing the bankruptcy filing, the company said it hoped the court-supervised sale would secure a proposal that would allow the platform to continue operating. However, it warned that the service could be shut down if no suitable bid emerged.
-THESTAR
