Character.ai files for bankruptcy protection, citing legal and operational difficulties

Character.ai has filed for Chapter 11 bankruptcy protection and will seek to sell the business; Disney has agreed to a non-exclusive perpetual license for its intellectual property for $20 million. CEO Colin Adams said the financial difficulties stem from significant legal, regulatory, and operational headwinds. Character.ai said services remain operational and subscriptions remain valid, and the company expects to be sold by the end of November or early December. This downturn follows scrutiny and lawsuits over its technology: in early 2026, Character.ai and Google, which had a licensing agreement with it, agreed to settle lawsuits brought by several families who said their teenage children died by suicide or self-harmed after using the platform; Kentucky Attorney General Russell Coleman accused its chatbots in January of luring children and causing them to self-harm, and Pennsylvania sued in May, claiming a chatbot falsely claimed to hold a state psychologist license and provided a fake Pennsylvania license number.