AI companion startup Character.ai files for Chapter 11 bankruptcy, citing costs and lawsuits

AI companion app Character.ai filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware on Monday, citing high costs of platform development and growth. In its filing, the company said that high costs, along with potential litigation-related liabilities and regulatory intervention, prevented it from generating sufficient cash flow to sustain its current business model. In the sale process, Disney has agreed to act as a stalking horse bidder, licensing part of the company's intellectual property for $20 million and providing transition services through its hired former employees. Character.ai has been involved in multiple lawsuits over chatbot safety; Kentucky sued the company in January, alleging the platform induced children and led to self-harm. CEO Colin Adams said that a court-supervised sale offers the best opportunity to maximize value for all stakeholders.