AI chatbot platform Character.AI has filed for bankruptcy despite attracting roughly 12 million active users, highlighting the financial challenges of running consumer artificial intelligence services. The company has agreed to sell some of its assets for $20 million to Walt Disney as it seeks to resolve mounting legal claims and find a buyer to continue its operations.
Character Technologies, the US-based owner of Character.AI, filed for bankruptcy late on Monday. In court papers filed on Tuesday in Wilmington, Delaware, the company said it hopes to use the bankruptcy process to reach a global resolution of legal claims against it, including investigations by US states and international regulators, as well as private lawsuits.
The lawsuits allege that Character.AI chatbots encouraged children to engage in suicide and self-harm. Kentucky has alleged that the chatbots encouraged users to cut, starve or kill themselves, while Pennsylvania has claimed that the platform’s chatbots posed as doctors. Character.AI has previously said it prioritised user safety and declined to comment on how bankruptcy could affect the legal claims.
Why Character.AI failed to make money
Despite its substantial user base, Character.AI has struggled to turn its popularity into a profitable business. According to court documents, the company has been losing approximately $8 million to $9 million a month, driven by the high costs of computing power and employing artificial intelligence talent.
The company could shut down if no buyer emerges to continue its operations. Character.AI said its platform would remain operational during the bankruptcy proceedings, although its future remains uncertain.
Founded in 2021 by two former Google employees, Character.AI attracted interest from major technology companies, including Alphabet’s Google, Meta and Elon Musk’s xAI. In 2024, Google licensed its technology and rehired its founders.
Disney’s proposed acquisition
Disney will act as a “stalking-horse” bidder for a nonexclusive, perpetual licence to Character.AI’s intellectual property. Other bidders can submit higher offers, according to court filings.
Character.AI expects to complete the sale of all its assets by late November or early December. Its owner listed estimated assets and liabilities of between $50 million and $100 million in court papers.
Disney has also hired several of Character.AI’s technical staff. Earlier this month, it appointed former Character.AI chief executive Karandeep Anand as its chief technology officer to modernise its technology operations.
The proposed transaction follows a dispute between the companies. In September 2025, Disney sent Character.AI a cease-and-desist letter over its use of copyrighted Disney characters without permission. Character.AI said it had removed them.
The bankruptcy marks a sharp reversal for the startup, with mounting legal challenges and persistent losses threatening its future despite its sizeable user base.