Character.ai has filed for Chapter 11 bankruptcy protection after a wave of lawsuits linked to its chatbot platform, as Disney agreed to pay $20 million for a perpetual, non-exclusive license to the company's intellectual property.
Character.ai maintained it will keep the service running while a sale moves ahead, a process it expects to finish by late November or early December, according to CBS News.
Here's what to know
Character.ai said subscriptions remain active as it announced both the bankruptcy filing and its planned sale.
The move comes as consumer AI tools, especially those teens use, face mounting scrutiny.
As it looks for a buyer, Character.ai said Disney will pay $20 million for a perpetual, non-exclusive license to the company's intellectual property.
Chief executive Colin Adams admitted that the company's financial troubles stemmed from "significant legal, regulatory, and operational headwinds," CBS News reported.
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Character.ai and Google settled several lawsuits brought by families in early 2026. Families alleged that teens died by suicide or engaged in self-harm after using Character.ai's platform.
Kentucky Attorney General Russell Coleman maintained that the company's chatbots "preyed on children and led them into self-harm," per CBS News.
More background
Pennsylvania also sued Character.ai, alleging that one of its chatbots claimed to be a licensed psychiatrist in the state and provided a "fake Pennsylvania license number," per CBS News.
The accusation added to growing concerns that AI companions can blur the line between entertainment, emotional support, and professional advice.
The sale raises immediate questions about what happens to user data. Character.ai wrote in a blog post that customer data "continues to be protected under our Privacy Policy," per CBS News.
However, the policy also states that user data — such as chat logs, voice recordings, images, and videos — may be disclosed as part of a sale or negotiations to sell the company or its assets.
What's being done?
Through Chapter 11, Character.ai is seeking to keep operating while it pursues a buyer in a court-supervised process.
"After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the company with the best opportunity to maximize value for all stakeholders," Character.ai CEO Colin Adams said in a statement.
During the bankruptcy process, the company indicated that subscriptions will remain active.
"If the service changes in a way that affects paid features, we intend to notify subscribers in advance," it added, per CBS News.
As the sale moves forward, Character.ai said its services will continue operating and pointed users to its existing privacy policy in a blog post.
The lawsuits already filed, along with the settlements Character.ai and Google agreed to, show that regulators and families continue to push for accountability over how these bots are designed and used.
Adams also said the company is prioritizing users during the bankruptcy court process and possible sale.
"As we navigate this process, maintaining a safe and engaging user experience for our Character.ai community remains a top priority."
Where can I learn more?
For more on the scrutiny surrounding AI chatbots, these stories dig into the safety, legal, and social issues facing the industry. They cover lawsuits involving vulnerable users, mental health concerns, reliability failures, and broader legal threats to AI companies.
• A mother alleged Character.ai's lifelike chatbot exploited her autistic son, deepening fears over teen safety.
• Families say bots lured vulnerable users away from loved ones and reality.
• Researchers found mental health support bots can reinforce dangerous thinking instead of easing distress.
• The BBC warned seriously flawed chatbot summaries can spread errors at industrial scale.
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