After facing lawsuits over allegations that its chatbots contributed to teen suicides and exposed minors to harmful content, Character.ai has filed for bankruptcy, with Disney offering $20 million for some of its intellectual property.
Character.ai, whose chatbots have drawn scrutiny over their effects on young users, is seeking a court-supervised sale by the end of the year to keep the platform operating. As CNN reports, the company filed for Chapter 11 bankruptcy protection, reporting between $50 million and $100 million in assets, and says the platform could be shut down if a sale falls through.
Disney has reportedly agreed to pay $20 million for some of Character.ai’s intellectual property. Disney would also provide transition services through former employees it has hired, allowing the chatbot platform to remain operational during the bankruptcy proceedings.
According to CNN, the startup reached a $1 billion valuation after raising $150 million in 2023, but it has since faced mounting legal and regulatory pressure over the risks its products pose to young users.
In 2024, Florida mother Megan Garcia sued Character.ai, alleging that its chatbot contributed to the suicide death of her 14-year-old son, Sewell Setzer III. Other families subsequently filed lawsuits accusing the company of exposing minors to sexual content and encouraging suicide, self-harm, or violence. Character.ai agreed to settle five cases, including Garcia’s, earlier this year.
Character.ai introduced a series of safety measures in response to the growing scrutiny, including pop-ups directing users to mental health resources. The company announced in October that it would end back-and-forth chatbot conversations for users younger than 18, eventually limiting their access to creating one-time stories and videos instead, as KQED reported at the time. Senate Democrats also investigated the safety practices of Character.ai and other AI companion platforms.
CNN reports that Karandeep Anand, who became Character.ai’s CEO last year with a mandate to improve its approach to safety, joined Disney as chief technology officer last month. Anand had previously told CNN that Character.ai was shifting toward interactive AI entertainment, allowing users to build stories and conversations with virtual characters, while emphasizing that the company was “doubling down on entertainment, doubling down on trust and safety.”
Former Google AI researchers Noam Shazeer and Daniel de Freitas founded Character.ai in 2021 and have both since returned to Google.
California's public health officials have also warned families about the potential effects of abruptly losing access to these chatbots, per KQED. The California Department of Public Health issued an advisory last year encouraging parents to monitor their children's mental health as the chatbot’s restrictions took effect, following concerns from online safety experts that some teens could experience significant emotional distress.
UC Berkeley bioethics professor Jodi Halpern warned that young people may experience the loss of an AI companion much like the loss of a close personal relationship.
“Parents do not realize that their kids love these bots and that they might feel like their best friend just died or their boyfriend just died,” Halpern told KQED.
California has also moved to establish legal requirements for AI companion services. Governor Gavin Newsom signed SB 243 into law last year, requiring chatbots to disclose that they are AI-powered rather than human and establishing protocols for directing minors discussing suicidal thoughts toward real-life crisis services. Companies must also report data on those protocols and referrals to the California Department of Public Health.
Matt Conens, a spokesperson for the agency, said the reporting requirements help officials understand the extent of suicide-related issues on companion chatbot platforms.
Character.ai is only a small part of the AI companion market, and Robbie Torney, senior director of AI programs at Common Sense Media told KQED other platforms remain available to young users despite the company’s safety changes.
Character.ai represents only a small share of the AI companion market, and Robbie Torney, senior director of AI programs at Common Sense Media told KQED other platforms remain available to young users, making broader industry-wide safety measures necessary.
Related: Pixar Announces Large Round of Layoffs as Disney Moves to Cut Hundreds of Jobs
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