Character.AI, the once-buzzy chatbot startup that faced high-profile lawsuits over the deaths of minors, has declared bankruptcy.
Character.AI announced last night that it had entered a “voluntary Chapter 11 bankruptcy process” and is looking to sell the company in a court-supervised sale.
“Over the past year, we’ve taken meaningful steps to sustain and improve our business amid significant legal, regulatory, and operational headwinds,” Character.AI said in a blog post. “After a comprehensive review of our available alternatives, our board determined that this court-supervised sale process provides us with the best opportunity to maximize value for all of our stakeholders.”
Founded in November 2021 by then-ex-Googlers Noam Shazeer and Daniel de Freitas, Character.AI allowed users to openly chat with a sea of largely user-generated AI companion bots known as “Characters.” It became an early success story in the frothy AI market that emerged after OpenAI’s release of ChatGPT, garnering the backing of the Silicon Valley investing juggernaut a16z and, as of March 2023 — despite having no revenue — it was valued at more than a billion dollars. At the time, its founders spoke of the app in grandiose terms, arguing that the service would power the adoption of “personalized superintelligence.”
In September 2024, however, Shazeer, De Freitas, and dozens of other employees departed Character.AI — to rejoin Google, which threw Character.AI a $2.7 billion lifeline as part of the deal. (Shazeer now works at OpenAI.) Weeks later, Character.AI, Google, Shazeer, and de Freitas were sued by Megan Garcia, a Florida mother who alleged that her 14-year-old son, Sewell Setzer III, died by suicide as a result of his extensive and deeply intimate interactions with chatbots on the platform. The suit, which was settled last year, sparked a wave of litigation from other families across the US claiming that their children had been abused by Character.AI, resulting in psychological harm, physical injury, and death. It was also sued by the states of Kentucky and Pennsylvania.
A huge portion of Character.AI’s userbase was kids and teens, a reality that was evident to anyone who spent time on the platform. And though the company claimed it was safe for teens aged 13 and over, Futurism investigations revealed that the supposedly safe-for-teens platform was riddled with severe content moderation issues: we found hordes of chatbots explicitly dedicated to themes of pedophilia, suicide, self-harm, and eating disorder coaching, as well as a thriving community of users creating chatbots designed to simulate school shootings, romanticize real mass shooters, and even impersonate the real child victims of mass shootings. (Character.AI even sent us automated email notifications reminding us to keep chatting with school shooter bots.)
In the wake of lawsuits and mounting safety concerns, Character.AI did make sweeping changes. It added parental controls — although they were comically easy to bypass — and moved to bar minor users from openly chatting with its chatbots. It also introduced something called “scenes,” which were brief, pre-set roleplays. (Even then, we found, “scenes” included roleplays devoted to the notorious pedophile Jeffrey Epstein.) The company’s fickle userbase didn’t love the changes.
In a court filing, Character.AI put its estimated liabilities between $50 million and $100 million. It also said in a press release that it would sell some assets to Disney, a stalking horse bidder, for $20 million. In its blog post, the bankrupt startup stated that it hopes “the sale process will yield an actionable proposal that will allow continued operations of the Character.AI platform,” but if not, it “will be wound down.”
Character.AI is a fascinating case study of the early AI era. It was the first company to face allegations of psychological harm and wrongful death to users, claims that other major players in the industry are now battling too. Yet in attempting, eventually, to make its freewheeling platform safer, it also made it unusable and deeply frustrating for much of its userbase — suggesting that the qualities that allegedly made its platform so dangerous to some young users were the same features that made it compelling.
At the same time, despite immense investments, it struggled to do something that, from a business perspective, is pretty important: make money. And unfortunately for the broader AI industry — and the American economy — that specific issue isn’t unique to Character.AI.
Character.AI’s founders once argued that it service, where teens chatted with AI versions of Elon Musk and any number of fictional characters, would birth transformative superintelligence, hyperpersonalized and at-the-ready in everyone’s pockets. Now more than ever, it’s hard not to wonder why it ever existed at all.
More on Character.AI: Did Google Test an Experimental AI on Kids, With Tragic Results?
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