Chatbot startup Character.AI files for bankruptcy, and Disney is first in line for key assets

• Character.AI has filed for Chapter 11 bankruptcy as it pursues a court-supervised sale.
• Disney has offered $20 million for a license to certain assets, though other bids could prevail.
• The chatbot platform, which has faced lawsuits over child safety, could be wound down if a sale fails.

Character.AI, the chatbot startup founded by former Google researchers, has filed for bankruptcy.

The California-based company said it had initiated a voluntary Chapter 11 process in Delaware to pursue a court-supervised sale of all or substantially all of its assets.

Character.AI, which lets users create personalized AI bots, said its platform would remain online during the sale process, which it expects to finish by late November or early December.

The company has agreed to let Disney Worldwide Services, an affiliate of the Walt Disney Company, act as the opening bidder for a non-exclusive, perpetual license to certain Character.AI intellectual property and claims.

Disney said it would pay $20 million and provide transition services using former Character.AI employees it has hired. Other potential buyers can still make higher bids under the bankruptcy process. Last month, Disney hired former Character.AI CEO Karandeep Anand as its CTO.

Character.AI's CEO Colin Adams said in a Monday statement that it had taken steps to "sustain and improve" its business amid "significant legal, regulatory, and operational headwinds."

"After a comprehensive review of our available alternatives, our board determined that this court-supervised sale process provides us with the best opportunity to maximize value for all of our stakeholders," the company said in a blog post on Monday.

The startup said paid subscriptions remain active and billing is unchanged for now. But it warned that if the sale does not produce a bid sufficient to keep the platform running, it will wind down the service.

Character.AI hit with lawsuits

Character.AI did not spell out the legal, regulatory, and operational pressures that led to the filing. But the company has faced growing scrutiny over the potential effect of its AI companions on young users.

It announced last year that it would ban under-18s from having open-ended conversations with its chatbots, following concerns about AI's impact on children and teenagers.

Prior to that, Character.AI had faced lawsuits from families who alleged its chatbots contributed to teenagers' mental-health crises. Earlier this year, Character.AI and Google agreed in principle to settle several of those cases, including claims brought by families of teenagers who died by suicide or experienced self-harm after using the chatbots.

One Texas lawsuit alleged that a Character.AI chatbot encouraged a teenager to kill his parents over limits on his screen time. That case was among those the companies agreed in principle to settle. The terms were not disclosed.

The startup was founded in 2021 by former Google researchers Noam Shazeer and Daniel De Freitas. Google rehired the pair in 2024 and paid for non-exclusive rights to use Character.AI's technology, while the startup continued as a separate company.

Character.AI said its privacy and security practices remain unchanged during the bankruptcy process.

It said users can continue to access its services and export their data or delete their accounts through its app or website.