According to a dismissal order in one of the cases, the overall settlement was approved by a California probate court in July, and the court assigned an arbitrator to hear all issues relating to each individual settlement. On October 11, a day before Character.AI declared bankruptcy, the arbitrator approved each settlement.
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 all times”, Character.AI continued to develop AI tools, including “generating real-time audio FaceTime-style videos 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 strategic buyer or investor. According to bankruptcy filings, Character.AI and the banker received “consistent feedback” that its product and user base were “impressive” but that surrounding litigation and “regulatory overhang” made it unbuyable.
In November, Character.AI learned that a coalition of state attorneys general had begun investigating the company. When the company filed for bankruptcy, the number of states and territories involved in the multistate investigation had grown to 46.
According to a notice of interest filed in the bankruptcy proceeding by the National Association of Attorneys General on behalf of 40 states, those states’ investigations revealed “serious problems” with Character.AI, including screenshots of Character.AI chatbots encouraging minors to hide their injuries and kill their parents.
A Character.AI spokesperson said the filing “is not an accurate representation of the security of our platform.”
The documents indicate that Character.AI was in negotiations with the states on how to resolve the identified issues, but reached no agreement before declaring bankruptcy.
If the deal is completed and approved by the courts, Disney will have both Character.AI’s staff and much of its technology stack, but will be able to avoid the ongoing legal issues that contributed to Character.AI’s downfall, including the multi-state investigation.
States that have filed notice of interest in bankruptcy have made it clear that they reserve the right to challenge any proposed bankruptcy, which could trigger a fight over the ultimate outcome of the bankruptcy.
“It’s bad for society to let corporations exercise control without taking responsibility,” Newman says. “And this is what it looks like.”
Gn bussni
