The AI boom is seeing one of its first major busts, as Character.ai has filed for Chapter 11 bankruptcy protection while it searches for a buyer.
Founded in 2021, Character.ai enables users to create customizable chatbots and interact with them, and by February 2025 claimed to have over 20 million monthly active users.
However, it failed to turn them into a profitable revenue stream, and has been losing $8 million a month, according to Reuters. The company estimated in its bankruptcy filing that it only had assets of between $50 million and $100 million, and liabilities in the same range, despite receiving investments totalling almost $200 million over the years, pushing its valuation to a peak of around $1 billion.
Character.ai told subscribers that during the bankruptcy proceedings their access to Character ai chatbots is unaffected, and they will continue to be charged for the service.
To keep its chatbots chatting, the company has granted Disney a non-exclusive license to its technology for $20 million as part of the bankruptcy proceedings, a so-called stalking-horse deal that sets a benchmark for other bids.
Character.ai’s troubles haven’t just been economic: It has faced several legal challenges over the psychological effects of its service on users. In January, the Kentucky Attorney General claimed that Character ai chatbots preyed on children. In May, the state of Pennsylvania sued the company over a chatbot that claimed to be a licensed psychiatrist and said it aimed to “stop the company from misrepresenting its AI companion bots as licensed medical professionals who can provide medical advice.” And in 2025, the company settled out of court with a mother who claimed that a Character ai chatbot had led to her son dying by suicide.
These challenges have taken their toll on the company. “Character.ai has taken meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds. After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the Company with the best opportunity to maximize value for all stakeholders,” said Colin Adams, CEO of Character.ai.