Character.AI, a service where users can chat with AI characters they create, has filed for protection under Chapter 11 of the U.S. Bankruptcy Code, a restructuring process. Court filings put both its assets and liabilities in the $50 million to $100 million range. The company will continue operating during the sale process and has agreed to sell some assets to Disney for $20 million. However, no buyer has yet been found for the platform as a whole.
What Exactly Is Character.AI?
Character.AI lets users create AI characters to their liking and chat with them. If conventional conversational AI is a “useful tool that answers questions,” Character.AI was more like a place to create a “conversation partner” and have fun. Users could give characters personalities like those of anime characters or chat casually with them like friends; the possibilities depended on their imagination.
The company was founded in late 2021. Its founders were former Google engineers Noam Shazeer, a co-author of the “Transformer” paper known for underpinning modern AI, and Daniel De Freitas. Initially, they worked both on training foundational models—the large-scale models that serve as the brains of conversational AI—and on building a chat platform where users could talk with characters.
Rapid Growth in Numbers
The momentum was reflected in the numbers. In September 2022, the company raised $150 million, reaching a valuation of more than $1 billion and joining the ranks of “unicorns.” At the time, it said users and bots had exchanged more than 2 billion messages over five months, and that active users spent an average of more than two hours a day on the platform.
The company launched its app in May 2023, which was installed more than 1.7 million times in its first week. Monthly active users reached 20 million in October 2024. According to PitchBook, total funding exceeded $193 million, with investors including Lightspeed, SV Angel, Greycroft and a16z.
It is clear that the company built a service in just a few years that people wanted to talk to for two hours a day. Why, then, was it unable to avoid bankruptcy?
How a Deal with Google Changed the Company
The turning point came in August 2024. Google signed a $2.7 billion licensing agreement to use the company’s models, and Shazeer and De Freitas returned to Google. Dominic Perella, who had served as general counsel, became interim CEO, and the company shifted away from training foundational models to focus on growing its service.
Giving up the work of building the brains and focusing on expanding the service made the company leaner. But it also meant that the burden of turning user numbers into revenue fell entirely on the operator.
Lawsuits and Regulation Over Minors’ Safety
The headwinds came from safety concerns. After a 14-year-old boy in Florida died by suicide, his mother sued the company, alleging that “her son had become obsessed with chatbots on the platform.” Texas later launched an investigation into whether the company complied with laws on children’s privacy and safety.
The company settled some parts of the lawsuit, added safety features and banned minors from using the service. For a service whose core users were young people, that decision must have struck at the foundations of its business.
In June 2025, Karandeep Singh Anand, who had experience at Brex and Meta, became CEO. The company has added AI video generation and social feeds, and is also trying to attract users with formats such as interactive stories and microdramas.
Why Popularity Doesn’t Translate into Profit for AI Services
Data from research firm Sensor Tower ranked Character.AI among the apps with the longest usage times. But generative AI has a key characteristic: the more it is used, the more it costs. Every time a user sends a message, computing resources are needed behind the scenes to run the AI. The longer users spend on the service, the greater the pressure to monetize it—and having many devoted fans can itself become a burden.
Adding features such as video generation and social functions did not make the business more sustainable. The case offers a clear, numbers-backed example of how difficult it is for consumer AI services to balance scaling up with monetization.
In my view, “keeping users from leaving” and “getting them to pay” are separate challenges. Should the business rely on advertising or monthly subscriptions? Given the nature of the product as a conversation partner, stronger safety measures can change the experience and affect users’ enthusiasm. Few AI services have managed to strike this balance.
Asset Sale to Disney and the Platform’s Future
Under the current proceedings, Disney will acquire some assets for $20 million and also receive a nonexclusive, perpetual license to the company’s technology. Transition support is expected to come from former Character.AI employees who moved to Disney last month along with former CEO Anand.
CEO Colin Adams said the business would continue operating during the sale process, which is expected to be completed between late November and early December. However, no bids for the assets or buyers have emerged so far. Adams said he hoped a viable offer would come in and the business would continue operating, adding that otherwise the platform would shut down.
The deal with Disney covers some of the assets and rights to use the technology; it is separate from whether the Character.AI service itself will continue to exist. For users, the outcome hinges on whether a buyer emerges during the sale process over the coming weeks.
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