A controversial Bay Area artificial intelligence (AI) startup that’s been linked to teen suicides filed for Chapter 11 bankruptcy on Monday (Oct 12), and a former adversary is already swooping in to collect the scraps.
Character.AI, a chatbot platform with a vast array of characters for conversation, was launched in 2022 by two former Google engineers. But after four years and several lawsuits alleging the platform was dangerous for children, Character.AI is asking the court to help find a buyer. In the meantime, the company announced that it signed a US$20mil (RM82mil) deal with Disney to assist in the transition, and in return, the media giant gets to license some of Character.AI’s tech.
It’s a sharp about-face from last year when Disney threatened to sue Character.AI for allegedly using copyrighted characters without permission. Now, it appears that Disney is smelling opportunity in Character.AI’s downfall, as it announced last month that it hired the chatbot platform’s CEO to a newly created C-suite position at the entertainment company.
“Over the past year, Character.ai has taken meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds,” Character.AI CEO Colin Adams said in a statement. “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 maximise value for all stakeholders.”
The Menlo Park-based startup will continue to operate while the court-facilitated sale proceeds, according to the news release, allowing the company to continue to pay wages and operate the platform.
Bankruptcy filings show Character.AI owes millions of dollars. Google topped Character.AI’s list of companies that it owes the most money to with more than US$4mil (RM16.33mil), followed by law firm Hogan Lovells with around US$2.1mil (RM8.6mil), DigitalOcean with around US$1.9mil (RM7.8mil), Fireworks.AI with US$813,900 (RM3.2mil) and an Apple subsidiary with US$384,683 (RM1.6mil). Further down on the list is DoorDash, which Character.AI owes US$89,996 (RM367,363). DoorDash did not respond to SFGATE’s questions on whether that total was due to unpaid meal deliveries.
In addition to companies, the filing also shows that Character.AI owes unknown amounts related to lawsuits filed by the states of Pennsylvania and Kentucky. Pennsylvania sued Character.AI in May, alleging that its chatbots posed as licensed medical professionals, and Kentucky sued in January, with a new filing in that case claiming its chatbots encouraged teens to cut and starve themselves.
In its short existence, the company has been the subject of multiple lawsuits from parents who allege that the chatbots encouraged sexually explicit conversations with their kids.
The litigation includes a 2024 lawsuit over the death of 14-year-old Sewell Setzer, who died by suicide in 2024 after developing a relationship with a chatbot character from Game of Thrones. His mother settled that suit for an undisclosed amount in January, and the company made sweeping changes for users younger than 18 in the wake of Setzer’s death.
In a blog post about the filing, Character.AI noted that it expects the court-facilitated sale to be finalised by the end of the year.
“We hope that the sale process will yield an actionable proposal that will allow continued operations of the Character.ai platform,” the post reads. “If such a bid is unavailable, however, the platform will be wound down.” – SFGate, San Francisco/Tribune News Service
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