Character.AI files Chapter 11 as Disney bids $20 million

Character.AI filed for Chapter 11 bankruptcy on 13 October 2026, five years after its founding, and agreed to sell some of its assets to Disney for $20 million. In a court document, the company said it had assets and liabilities between $50 million and $100 million. The chatbot platform, which lets users create AI characters and converse with them, will continue operating during the sale process.engadget.com+1

What the filing changes

Character.AI CEO Colin Adams said the board chose a court-supervised sale process after reviewing alternatives. "After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the Company with the best opportunity to maximize value for all stakeholders," Adams said in a statement. He attributed the company's problems to "significant legal, regulatory, and operational headwinds."

Disney agreed to pay $20 million as the lead "stalking horse" bidder — a first offer that sets a floor for other bidders to beat — for certain assets and a non-exclusive perpetual license to Character.AI's technology. Disney will provide transition services using former Character.AI employees who joined the entertainment company alongside former CEO Karandeep Anand. The company expects the sale to close in late November or early December.

Character.AI's financial troubles followed lawsuits and regulatory scrutiny. In early 2026, Character.AI and Google, which had a licensing deal with the company, settled several lawsuits filed by families whose teenage children died by suicide or harmed themselves after using the platform. The company also settled a wrongful death lawsuit earlier in 2026 with a Florida family, the first filed in the U.S. against an AI company.

Where the numbers came from

Several states sued Character.AI over its technology. Kentucky Attorney General Russell Coleman alleged in January that its chatbots "preyed on children and led them into self-harm." In May, Pennsylvania sued after one of Character.AI's chatbots allegedly claimed to be a licensed psychiatrist and provided a "fake Pennsylvania license number." Texas also investigated whether the platform conformed to child privacy and safety laws.

Character.AI raised over $193 million in funding across multiple rounds from investors including Lightspeed, SV Angel, Greycroft, and a16z, according to PitchBook. Founded in late 2021 by former Google engineers Noam Shazeer and Daniel De Freitas, the company reached unicorn valuation with a $150 million fundraise by September 2022. In August 2024, Google struck a $2.7 billion deal to license the startup's models, and both co-founders returned to Google.

Adams said the company would continue operating during the sale process but noted there is not yet a bid for the company's assets or a buyer beyond Disney's opening offer. "We hope that the sale process will yield an actionable proposal that will allow continued operations of the Character.ai platform. If such a bid is unavailable, however, the platform will be wound down," Adams wrote.

What happens next

Character.AI said its services continue to operate and subscriptions remain active. The company said customer data continues to be protected under its Privacy Policy, which states that data including chat transcripts, voice recordings, and images and videos could be disclosed in connection with a sale. Users can delete their account or export their data through the app or the website.

The sale process is expected to close in late November or early December. If higher bids emerge, Disney's $20 million offer could be exceeded; if no acceptable bid is found, Adams said the platform will be wound down. Subscribers will be notified in advance if the service changes in a way that affects paid features.