The Tech Justice Law Project and the Social Media Victims Law Center, which represented plaintiffs in many of the lawsuits, declined to comment.
Despite losing key personnel after the Google transaction and, according to the current CEO, struggling with profitability “at every turn,” Character.AI continued to develop artificial intelligence tools, including “generating FaceTime-style videos with real-time audio with fictional characters,” according to the current CEO’s statement.
In August 2025, Character.AI worked with an investment banker to try to find a buyer or strategic investor. According to the bankruptcy documents, Character.AI and the banker received “constant feedback” that its product and user base were “impressive,” but that surrounding litigation and “regulatory overreach” made it impossible to buy.
That November, Character.AI learned that a coalition of state attorneys general had begun investigating the company. By the time the company filed for bankruptcy, the number of states and territories involved in the multistate investigation had increased to 46.
According to a notice of interest filed in bankruptcy proceedings by the National Association of Attorneys General on behalf of 40 states, those states’ investigations uncovered “serious problems” with Character.AI, including screenshots of Character.AI chatbots encouraging minors to hide their self-harm and kill their parents.
A Character.AI spokesperson says the filing “is not an accurate depiction of the security of our platform.”
The documents say Character.AI was in the process of negotiating with states on how to address the problems they identified, but did not reach any agreement before filing for bankruptcy.
If the deal is completed and approved by the courts, Disney will have both Character.AI’s staff and much of its technology, but will be able to sidestep the ongoing legal issues that contributed to Character.AI’s downfall, including the multistate investigation.
States that filed a notice of interest in bankruptcy have made clear that they reserve the right to challenge any bankruptcy plan, which could lead to a fight over the final outcome of the bankruptcy.
“It’s bad for society to allow corporations to exercise control without accountability,” Newman says. “And that’s what it looks like.”
This story originally appeared on wired.com.
