Character.ai was one of the hottest start-ups of the AI boom. You could chat with AI versions of anime heroes, film villains or characters you invented yourself. In early 2024 it had about 3.5 million visitors a day.
On 12 October 2026, it filed for Chapter 11 bankruptcy and said it will sell the business. Boss Colin Adams blamed “significant legal, regulatory and operational headwinds.”
How do you lose a billion?
Two former Google engineers, Noam Shazeer and Daniel de Freitas, started the company in 2021. By March 2023, investors valued it at about $1 billion. Then in 2024 the founders and part of the team went back to Google, in a deal described as worth $2.7 billion, and Google got a licence to the technology. So the people who built it left with a very nice goodbye, and the company stayed behind.
The lawsuits
The bigger weight was legal. Several families sued, saying the app harmed their teenagers. The first and best-known case, about a 14-year-old in Florida who died in 2024, was settled this year, and more cases were settled with Google in early 2026. Two US states also went after the company. In late 2025 it stopped letting under-18s chat with its bots at all, which also cut a big part of its audience.
Enter Disney
Disney has offered $20 million for a licence to Character.ai's technology and other intellectual property. In bankruptcy language that's a “stalking horse”: the opening bid, which others can beat. A judge has to approve, possibly by early December. Twenty million for something once worth a billion. That's a 98% discount; even Black Friday can't compete.
The app still works for now. If you used it, you can export or delete your chats in the app, because the privacy policy says data could be passed on in a sale.