Character.AI Files for Bankruptcy as Disney Bids for AI Chat Startup

Character.AI Files for Chapter 11 Bankruptcy

Character.AI, the app where millions chat with AI versions of fictional characters, filed for voluntary Chapter 11 bankruptcy in Delaware on October 12. The company plans a court-supervised sale of its assets and says the platform will be shut down if no buyer agrees to keep it running.

Disney Leads Opening Bid at $20 Million

Disney Worldwide Services is the "stalking horse" bidder, offering $20 million for a non-exclusive, perpetual license to some of Character.AI's intellectual property and certain legal claims. Non-exclusive means Disney can use the technology, but so can other buyers. The offer also includes transition services from former Character.AI employees that Disney has already hired.

Earlier this year, Disney hired Character.AI CEO Karandeep Anand as its first-ever chief technology officer, and several engineers joined him. This came after Disney sent a cease-and-desist letter in September 2025 over chatbots imitating Disney characters, which Character.AI promptly took down.

Key Financial Details

• The company estimated its assets and liabilities between $50 million and $100 million in its bankruptcy petition.
• Character.AI reported an operating loss of approximately $8 million to $9 million per month.

The sale is expected to close in late November or early December.

• The company previously raised $150 million in 2021 from Andreessen Horowitz at a $1 billion valuation.

Legal Troubles Weighed on the Company

Character.AI faced mounting legal pressure after a Florida mother sued in late 2024, alleging her 14-year-old son died by suicide after becoming emotionally attached to a chatbot modeled on Game of Thrones character Daenerys Targaryen. Additional lawsuits followed from other families. In September 2025, the Federal Trade Commission ordered Character.AI and six other tech companies to explain how they protect minors. Character.AI banned users under 18 from open-ended chats shortly after. In January 2026, the company and Google agreed to settle lawsuits from families in Florida, Colorado, New York, and Texas.

Google Deal and Shift Away From Core Tech

In August 2024, Google rehired both founders, Noam Shazeer and Daniel De Freitas, along with part of the research team, in roughly a $2.7 billion deal that also licensed Character.AI's technology. After that acqui-hire, Character.AI largely stopped building its own large language models, the AI engines that generate the chatbots' text.

Users Were Warned Just Weeks Before Bankruptcy

On September 28, Character.AI launched two new chat models and a cheaper $4.99 monthly subscription called (c.ai) lite. Only fourteen days later, the company was in bankruptcy court.

The app remains online for now. Paid subscriptions stay active and billing is unchanged. The company told users they can export their chats or delete their accounts. It also linked to mental health resources for users struggling with the news, including a nonprofit called Koko and a directory of free helplines. Its first suggestion, however, is a conversation with a "supportive AI guide"—another chatbot to help people cope with losing their chatbots.

Why the Sale Could End the Platform

CEO Colin Adams said the board chose a court-supervised sale after a year of trying to sustain the business amid "significant legal, regulatory, and operational headwinds." The company struggled to raise new investment capital despite progress with regulators and improvements to platform safety.

If no buyer commits to keeping Character.AI running, the characters users spent years building will go offline with it.

What Is Confirmed

Character.AI filed for voluntary Chapter 11 bankruptcy in Delaware on October 12. Disney is the opening bidder at $20 million for a non-exclusive IP license. The estimated asset and liability range is $50 million to $100 million. The company was losing $8 million to $9 million per month. The sale is targeted for late November or early December. The app remains online and active during the process.

What Is Still Unclear

It is not yet known whether any buyer other than Disney will submit a higher bid, or whether any buyer will agree to keep the full Character.AI platform running.

Sources

• Decrypt