Report from CNN
In Brief – Character.ai, an AI “companion” chatbot startup facing extensive regulatory pressure and lawsuits alleging its app contributed to teen mental health problems and suicides, has filed for Chapter 11 bankruptcy as part of a plan to sell its assets and preserve the platform’s operations in some form. The company, which reportedly has 12 million active users and losses of $8 million to $9 million a month, said it plans a court-supervised sale and that Disney has agreed to bid $20 million for certain intellectual property and provide transition services through former Character.ai employees it has hired. The arrangement will allow the platform to continue operating during bankruptcy, although the company says it will shut down without a sale. Founded in 2021 by former Google AI employees who eventually rejoined the digital giant, it reached a reported $1 billion valuation and now claims assets of $50-to-100 million. Facing accusations that its chatbots would sometimes provide sexual content to minors and encourage suicide, self-harm and violence, the company introduced several safety measures in late 2025, including blocking interactive chatbot conversations for users under 18, and agreed to settle five lawsuits in January 2026.
Context – Alleged harms to young people from engaging with AI “companions” has emerged as an AI version of the perceived worst of social media. Character.ai and Google together settled teen harm lawsuits bought by victims’ families in Florida, Colorado, Texas and New York. A 2025 ruling by Federal District Judge Anne Conway in the Florida-based case, rejecting the companies’ First Amendment-based motion to dismiss, in which the judge said she was “not prepared to hold that Character AI’s output is speech,” was a key driver. As we’ve seen from the lawsuits targeting social media platforms for allegedly unsafe design, even digital platforms protected from liability for user-generated content by Sec. 230 face tremendous liability in front of juries who’ve been told for years that social media is terribly dangerous. It’s unclear whether AI chatbots are even covered by Sec. 230, and “AI” may be less popular in the minds of prospective jurors than social media.