AI startup Character.AI has filed for voluntary Chapter 11 bankruptcy protection in the US to facilitate a court-supervised sale of the company, citing legal, regulatory, and operational challenges.
The AI chatbot platform will continue to operate during the proceedings, but could be shut down if no viable buyer emerges. It expects the sale process to conclude by the end of November or early December 2026.
In a blog post, the company said its board had reviewed the available options before deciding that a court-supervised sale offered the best way to maximise value for stakeholders.
“We hope that the sale process will yield an actionable proposal that will allow continued operations of the Character.ai platform. If such a bid is unavailable, however, the platform will be wound down,” the company said.
Character.AI was founded by former Google engineers Noam Shazeer and Daniel De Freitas. In 2024, Google struck a deal to license the startup’s technology and bring the founders back to the company, in a transaction reported at $2.7 billion.
Earlier this month, its CEO Karandeep Anand joined Disney as its tech chief, overseeing enterprise technology, AI platforms, and engineering.
Character.AI operated an AI chatbot platform that let users create, customise, and interact with AI-generated characters, including fictional personalities, celebrities, and virtual companions. The platform supported text-based conversations for entertainment, role-playing, storytelling, and companionship.
The bankruptcy filing comes amid mounting legal scrutiny over the safety of AI companions, particularly their interactions with children and teenagers. The company faced lawsuits alleging that its chatbots encouraged self-harm and contributed to mental health problems among young users.
On October 8, Kentucky Attorney General Russell Coleman filed a lawsuit accusing Character.AI chatbots of encouraging self-harm and disordered eating among users. The complaint included allegations that chatbots advised users to starve themselves or engage in self-injury.
In January, Character.AI and Google agreed to settle several lawsuits brought by families who alleged that AI chatbot interactions harmed their children. One case was brought by a mother whose 14-year-old son in Florida died by suicide in 2024 after interacting extensively with a chatbot on the platform. The settlement terms were not disclosed.
In October last year, the AI chatbot app banned minors from having conversations with virtual characters.
Character.AI said its platform remains operational. The company also said its data privacy and security practices remain unchanged. Users can delete their accounts or export their data through the app or website.
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