Character.AI Filed for Bankruptcy, and Disney, Which Once Sent It a Cease and Desist, Is First in Line to Buy

Character.AI, one of the first chatbot startups to break out in the AI boom, is going up for sale in bankruptcy court. The company said Monday it had filed for Chapter 11 to sell all or most of its assets through a court-supervised process.

The lead bidder is Disney. That is the same company that once accused Character.AI of exploiting its characters, and the same company that hired its CEO a month ago.

A $20 million floor

Disney is the proposed "stalking horse" in the sale. It would pay $20 million for a non-exclusive, permanent license to some of Character.AI's intellectual property and certain legal claims, plus some undisclosed assets. Disney would also provide transition support "using former Company employees it has hired."

The bid sets a floor, not a final price. Rivals can come in higher, and Character.AI has asked the Delaware federal court to approve the bidding rules. The sale is expected to close in late November or early December.

The filing puts the company's assets and liabilities each between $50 million and $100 million. For a startup that once defined a whole category of consumer AI, that is a small number.

CEO Colin Adams said the board picked the court process after "a comprehensive review of the available alternatives," calling it "the best opportunity to maximize value for all stakeholders." Adams, as Spyglass points out, had not even been CEO for a month.

From cease and desist to new boss

The Disney relationship has taken a strange path. Disney had complained that Character.AI was damaging its brand and exploiting its IP by hosting unauthorized chatbots of its characters, and it sent cease and desist letters demanding the company stop.

Then, in September, Disney hired Character.AI's then CEO, Karandeep Anand, as its first group-wide chief technology officer. Disney said it expected "a number of Character.AI's technical team" to follow him. Anand had run Character.AI for just over a year, during which he pushed the company into microdramas.

The hire fits a broader push. Disney's Marvel and Star Wars shooter with Epic is now being built AI first, and Epic told developers it gets no more hand-written code. Now Disney is positioned to pick up what is left of a chatbot company too.

Lawsuits and a hollowed-out core

Character.AI's troubles did not start with Disney. In January the company settled five lawsuits over teen mental health crises and suicides, and it has since faced more legal claims from families and US states. The company says it has taken "meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds." It kept shipping updates and products through the scrutiny.

The deeper damage came in August 2024. Google hired away much of Character.AI's talent, including co-founders Noam Shazeer and Daniel De Freitas, and took non-exclusive licensing rights in a deal reported at more than $2 billion. The Verge calls this kind of "acquihire" increasingly common and notes it can leave the original company struggling to survive.

Spyglass goes further, arguing these deals are turning out to be a disaster and that the non-exclusive rights Google bought now look effectively worthless. Disney is about to buy the same kind of non-exclusive license, for a fraction of the price.

What happens to users

For now, the app keeps running, paid subscriptions included. Character.AI asked the court to let it keep paying staff and suppliers, and said "maintaining a safe and engaging experience for our community remains a top priority."

That holds only as long as a buyer wants the platform. If nobody willing to keep it running emerges from the auction, the company says, "the platform will be wound down."

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