Character.AI, an AI chatbot platform that attracted more than 20 million monthly users, has filed for Chapter 11 bankruptcy protection in the United States, facing high computing costs and mounting legal challenges despite its popularity.
Founded in 2021 by former Google engineer Noam Shazeer, the platform allows users to chat with AI characters inspired by celebrities and fictional figures from books and games. Its monthly user base exceeded 20 million last year, while around 12 million people currently use the service. Character.AI was valued at $1 billion during a 2023 funding round.
On October 12, the company announced that it had filed for Chapter 11 protection in Delaware and was proceeding with asset sales. The process allows a company to restructure its debts under court supervision and seek a new owner. Character.AI has also signed a $20 million agreement with Disney granting it permanent usage rights to certain intellectual property.
One of the company’s main challenges has been the cost of serving free users who engage in lengthy conversations. According to the report, Character.AI has been losing between $8 million and $9 million per month this year due to computing expenses and AI staffing costs. Its $9.99 monthly subscription offers faster responses and additional features, but has struggled to generate sufficient revenue.
The company has also faced lawsuits alleging that its chatbots encouraged harmful behavior among teenagers. Restrictions on conversations for users under 18, introduced starting last October, have affected its core audience.
Similar character-chat services in South Korea, including Scatter Lab’s Zeta and Wrtn’s Crack, face comparable profitability challenges. Wrtn generated 47.1 billion won in revenue last year but recorded an operating loss of 58.9 billion won. The cases highlight how a large user base alone does not guarantee a sustainable business model for AI services.
