According to an order of dismissal in one of the cases, the overall settlement was approved by a California probate court in July, and the court tasked a referee to hear out all the issues pertaining to each individual settlement. On October 11, a day before Character.AI declared bankruptcy, the referee approved each settlement.
The Tech Justice Law Project and Social Media Victims Law Center, which represented plaintiffs in many of the lawsuits, declined to comment.
Despite losing key staff after the Google transaction and, according to the current CEO, struggled with profitability “at all times,” Character.AI continued to develop AI tools, including “real-time audio-driven FaceTime-style video generation with fictional characters,” according to the current CEO’s declaration.
In August 2025, Character.AI worked with an investment banker to try to find either a strategic buyer or investor. According to the bankruptcy filings, Character.AI and the banker received “consistent feedback” that its product and user base were “impressive,” but that the surrounding litigation and “regulatory overhang” made it unbuyable.
That November, Character.AI learned that a coalition of state attorneys general had started investigating the company. When the company filed for bankruptcy, the number of states and territories involved in the multistate investigation had climbed to 46.
According to a notice of interest filed in the bankruptcy proceedings by the National Association of Attorneys General on behalf of 40 states, those states’ investigations uncovered “serious issues” with Character.AI, including screenshots of Character.AI chatbots encouraging minors to hide their self-harm injuries and kill their parents.
A spokesperson for Character.AI says that the filing “is not an accurate portrayal of the safety of our platform.”
The filings say that Character.AI was in the process of negotiating with the states over how to address the issues they identified, but did not reach any agreements 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 sidestep the ongoing legal issues that contributed to Character.AI’s downfall, including the multistate investigation.
The states who filed a notice of interest in the bankruptcy have made it clear that they reserve their rights to challenge any bankruptcy plan, potentially setting up a fight over the ultimate outcome of the bankruptcy.
“It’s bad for society to let companies exercise control without responsibility,” says Newman. “And that’s what it looks like.”