Character.AI Operator Files for Chapter 11 Bankruptcy

Character Technologies, the company that operates the AI character chat service Character.AI, filed for Chapter 11 bankruptcy protection with the US Bankruptcy Court for the District of Delaware on October 12, according to byline.network. The company plans to hand over the business through a court-supervised sale process, which is expected to be completed between late November and early December. The service will remain operational until then.

Disney has offered to buy the rights to use some of the company's intellectual property for $20 million, according to the filing.

The bankruptcy follows a period of heavy spending on computing. Character.AI's computing costs averaged $13.8 million per month in the second half of 2024, and about $10 million per month last year, against revenue of $23.6 million last year. From January to August this year, the company spent $56.1 million on computing alone, with a monthly deficit of $8-9 million as of August. Subscription revenue peaked at $2.8 million per month, and advertising reached $2.5 million per month by August this year, nearly half of that month's $5.3 million revenue.

Character.AI was founded in 2021 by former Google researchers Noam Shazeer and Daniel De Freitas. It raised $150 million in a 2023 Andreessen Horowitz-led round at a $1 billion valuation, and monthly active users once grew to around 20 million. In August last year, the company appointed an investment bank and contacted about 28 parties but failed to raise funds over risk concerns.

The filing comes as Korean character chat operators face their own pressures. Scatter Lab, which runs Zeta, said on October 12 it will introduce a policy within the year limiting teen usage to three hours a day and monthly payments to 100,000 won. Wrtn Technologies announced on September 8 that it would limit teen usage of its Crack service to three hours a day and require guardian consent beyond three hours or 100,000 won in monthly payments, applying from early next year.