Character.AI, the controversial app that lets people create and chat with AI characters, has filed for Chapter 11 bankruptcy in the United States. Its owner, Character Technologies, filed in Delaware on Monday to run a sale of its assets, listing estimated assets and liabilities of between $50 million and $100 million each, about R845 million to R1.7 billion.

Disney has offered $20 million, roughly R338 million, to license some of its intellectual property, but if no sale is completed, the platform will be wound down.

Character.AI launched in 2021, founded by former Google AI researchers Noam Shazeer and Daniel de Freitas, and grew into one of the largest AI companion apps, where users hold ongoing one-on-one conversations and roleplays with AI personalities.

In 2024, Google signed a licensing deal for its technology and rehired both founders. Since then, the company has faced a wave of lawsuits from families alleging the app contributed to mental health problems and suicides among teenagers. It agreed to settle five of those cases in January, and it is also being sued by the US states of Kentucky and Pennsylvania.

Last November, it barred users under 18 from open-ended chats with its characters. In its filings, the company says the platform had become costly to develop and grow, and chief executive Colin Adams pointed to significant legal, regulatory and operational headwinds.

Disney's bid is a stalking-horse offer, meaning it sets the minimum price other bidders must beat, and the auction is expected to finish in late November or early December. Disney had previously accused Character.AI of using its copyrighted characters without permission, and recently hired several of its former employees.

CNN reported the filing and the earlier settlements with families, including the case brought by Megan Garcia. CNBC covered the company's own explanation in its court filings that the platform had become costly to develop and grow. Variety set out the terms of Disney's $20-million offer for a non-exclusive licence to some of the company's intellectual property.

Character.AI is the clearest case yet of an AI product that grew fast and then could not survive the consequences of who was using it. The product was designed to keep people talking to AI characters for long stretches, and that same design drew in teenagers, some of them vulnerable, with tragic outcomes alleged in court. A large, engaged user base did not save it once the legal and regulatory costs arrived.

It fits a wider pattern this year, from the EU proposing a social media ban for under-13s to Australia legislating algorithm opt-outs, in which regulators are moving to make platforms responsible for what their products do to young people.

South Africa has no rules aimed at AI companion apps, and the draft age verification rules focus on video platforms. For parents, the practical step is to know which AI apps children use and how often, because many of these services still rely on users stating their own age.

For anyone building consumer AI, the lesson is that safety for young users is a survival issue for the business, not only a matter of reputation.

If this story raises difficult feelings for you or someone you know, the South African Depression and Anxiety Group's suicide crisis line is free and available on 0800 567 567.

You might also like our piece on ChatGPT for Teens, the research on how students use AI, and TikTok's election centre with the IEC.

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