AI companion startup Character.ai files for Chapter 11 bankruptcy, citing costs and litigation

Character.ai, the startup behind one of the largest artificial intelligence companion apps, filed for Chapter 11 bankruptcy Monday, according to a company release and court filings.

The company said the platform, where users can have one-on-one conversations and roleplay with AI characters, became "costly to develop and grow," in filings to the Delaware District bankruptcy court.

"In its 4-year lifespan as an active platform, Character has amassed a large and engaged user base. The burgeoning and evolving field of AI entertainment, however, has proven to be costly to develop and grow," read a portion of the Chapter 11 filings.

"These high costs, coupled with potential litigation related liabilities and regulatory engagement have contributed to the Debtor's inability to generate sufficient cash flows to support its business in the present form," it said.

Character.ai has been embroiled in several lawsuits related to chatbot safety. In January, the state of Kentucky sued the company, alleging that the platform "preyed on children and led them into self-harm."

CEO Colin Adams said in a statement that a court-supervised sale "provides the Company with the best opportunity to maximize value for all stakeholders."

Ahead of the filing, Character.ai entered into an agreement for Disney to serve as a stalking horse bidder to license some of the company's intellectual property for $20 million, as well as provide transition services through former employees the media giant hired.

The company added that it expects to keep operating its platform through the sale process with minimal disruptions, but that the platform could end up being "wound down."