The app that made millions of people spend hours chatting with fictional heroes and fictional partners, AI, has filed for bankruptcy.

The company announced on Monday that it had initiated Chapter 11 voluntary bankruptcy proceedings. This is a procedure under U.S. bankruptcy law that allows a company to continue operating under the supervision of a judge while addressing debt repayment or asset sales. The case has been filed with the bankruptcy court in Delaware, USA.

Character.AI is not about restoring health through reorganization, but rather hopes to sell all or most of the assets under court supervision; if no bidder agrees to continue providing services, the company indicates that the platform will "will be wound down" – which in business terms means closure.

According to the press release from Character.AI, Disney's Disney Worldwide Services had already joined as a bidder under the name of “stalking horse” before submitting its application. In a bankruptcy auction, this means that it is the starting bidder, and other buyers must bid above this minimum price.

This media giant proposed to obtain a non-exclusive, permanent license for a portion of the intellectual property rights of Character.AI and certain legal claims for $20 million, as well as transitional services provided by former Character.AI employees that they have already hired. The non-exclusive nature means that Disney can use this technology permanently, but other parties who eventually buy the company will also be able to use it, and other bidders can still offer higher prices.

The company expects the transaction to be completed by the end of November or early December. Character Technologies Inc. This is the company's legal name; its bankruptcy application indicates that both assets and liabilities are estimated to be between 50 million and 100 million US dollars.

Three and a half years ago, Andreessen Horowitz led a $150 million financing round that raised the valuation of Character.AI to $1 billion; a16z's partner, Sarah Wang, wrote on Twitter at the time: " we are at the iPhone moment of AI ." The app was founded in 2021 by former Google engineers Noam Shazeer and Daniel De Freitas and allows anyone to create chatbots with personalized personalities to share with others.

In August 2024, Google approached them and rehired the two founders along with part of the research team for a deal worth approximately $2.7 billion. At the same time, they also obtained the licensing rights to Character.AI technology. Silicon Valley refers to this arrangement as acqui-hire, which means acquiring the talent without legally purchasing the company. Since then, Character.AI has basically abandoned the development of its own large-scale language models—the AI engines used to generate chatbot text.

Two months after the Google transaction, a mother from Florida, Megan Garcia, sued Character.AI, its founder, and Google, accusing her 14-year-old son, Sewell Setzer III, of committing suicide after developing an emotional attachment to a chatbot modeled after the "Game of Thrones" character Daenerys Targaryen. Subsequently, more families filed lawsuits. In September 2025, the U.S. Federal Trade Commission required Character.AI and six other technology companies to explain how they protect minors.

A month later, Character.AI prohibited users under the age of 18 from engaging in open-style chat with their characters, cutting off the core product that its youngest fans relied on. In January, the company reached a settlement with lawsuits filed by families in Florida, Colorado, New York, and Texas.

In September 2025, Disney lawyers sent a cease-and-desist letter to Character.AI regarding chatbots that imitated Disney characters, demanding that such activities be stopped, which constituted a formal legal requirement; subsequently, this startup company took these bots off the market. This September, Disney appointed Character.AI as its CEO and Karandeep Anand as its first Chief Technology Officer, stating that several engineers from that startup company would join them.

The current Character.AI CEO, Colin Adams, stated that the company has been trying to maintain its operations under “significant legal, regulatory, and operational headwinds” over the past year, before the board of directors decided to proceed with a sale under court supervision.

In addition to legal obstacles, the company is spending money too quickly, and the revenue disclosed is insufficient; its "monthly operating loss is approximately 8 to 9 million US dollars."

It was still difficult to raise more funds, ultimately making the entire operation unsustainable. In a sworn statement, it was said: " Notwithstanding the progress that has been made with regulators and personal injury claimants and enhancements to platform safety , Character has faced challenges in obtaining new investment capital ."

On September 28th, Character.AI launched two new models, featuring role-playing—that is, collaborative storytelling, with AI playing a certain role—as well as quick, casual chats similar to text messages. The company also introduced a cheaper subscription plan (c.ai), lite, priced at $4.99 per month or $2.49 per week.

14 days later, the company found itself in bankruptcy court.

The application is still online at present, paid subscriptions remain valid, and there have been no changes to the billing. The company also reminds users that they can export their chat records or delete their accounts.

Character.AI has also provided a support page for users who are still troubled by this news, which indirectly acknowledges that for some users, this application is more than just entertainment. AI companions – that is, chatbots designed to be friends or companions and capable of remembering past conversations – may become a daily emotional support for those who interact with them for extended periods.

This page directs users to Koko, a non-profit organization that offers free, anonymous micro-courses lasting 5 to 10 minutes to help people cope with stress and negative thoughts. It also provides a directory of free helplines staffed by real people. However, its first piece of advice is to engage in a conversation with a “supportive AI guide” – that is, to use a chatbot to help people deal with the emotions associated with losing a chatbot.

A study in February of this year examined five AI companion communities, including Character.AI, and found that when users' companions disappeared due to model updates or platform closures, the level of grief they reported was comparable to losing a person, and the platform provided no sort of closure at all. OpenAI also experienced a similar situation in February: it was discontinued – many users believed that this ChatGPT model was warmer than subsequent versions – and global users subsequently mourned for it publicly.

Currently, the bidding will take place at the bankruptcy court of Delaware, with the goal of completing the sale by the end of November or early December. If no buyer commits to continuing to operate Character.AI, the characters that users have built over the years will also be taken offline as a result.