Character.AI has entered Chapter 11 bankruptcy protection in Delaware and is seeking a court-supervised sale that could determine whether its chatbot platform survives. The company said the app will be wound down if no buyer agrees to keep it operating.
Disney Worldwide Services has submitted the opening bid, offering $20 million for a non-exclusive, perpetual license covering some of Character.AI’s intellectual property and certain legal claims. The proposal also includes transition services from former Character.AI employees who have already joined Disney. According to Decrypt, Disney’s offer is structured as a “stalking horse” bid, meaning it establishes a floor for other potential buyers in the bankruptcy auction.
The filing was made voluntarily on October 12 in the U.S. Bankruptcy Court for the District of Delaware. Character Technologies Inc., Character.AI’s legal name, estimated both its assets and liabilities at between $50 million and $100 million. The company expects a sale to close in late November or early December, subject to the court-supervised process.
A sale, not a conventional restructuring
Chapter 11 generally allows a company to continue operating while a court oversees its finances, including the repayment of debts or sale of assets. In Character.AI’s case, however, the stated objective is to sell all or substantially all of the company’s assets rather than rebuild the business independently.
The company said the platform remains available for now. Paid subscriptions remain active and billing is unchanged, while users can export their chats or delete their accounts. If no bidder commits to maintaining the service, Character.AI said the app will be “wound down,” meaning the platform would be shut down.
Disney’s license would be non-exclusive. That means the media company would receive continuing rights to use the specified technology, but those rights would not prevent another buyer from acquiring or using the same intellectual property under the bankruptcy process. Other bidders can submit offers above Disney’s opening proposal.
The development follows a difficult period for the startup. Chief Executive Officer Colin Adams said the company had spent the past year dealing with significant legal, regulatory and operational pressures. In a sworn statement, he said Character.AI had also struggled to secure additional investment capital. The company reported an operating loss of approximately $8 million to $9 million per month.
From billion-dollar valuation to bankruptcy court
Character.AI was founded in 2021 by former Google engineers Noam Shazeer and Daniel De Freitas. Its service allows users to create and share chatbots with distinct personalities, including fictional characters, imagined partners and other conversational personas.
About three and a half years ago, Andreessen Horowitz led a $150 million funding round that valued the company at $1 billion. In August 2024, Google rehired both founders and part of the research team in a deal valued at roughly $2.7 billion that also licensed Character.AI technology. The arrangement was widely described as an acqui-hire, in which a company brings in talent without formally acquiring the entire startup.
Character.AI later largely abandoned development of its own large language models, the systems that generate chatbot responses. The company also faced mounting scrutiny over the safety of AI companions and their use by minors.
In October 2024, Florida mother Megan Garcia sued Character.AI, its founders and Google, alleging that her 14-year-old son, Sewell Setzer III, died by suicide after becoming emotionally attached to a chatbot based on the Game of Thrones character Daenerys Targaryen. Other families filed lawsuits, and in September 2025 the Federal Trade Commission ordered Character.AI and six other technology companies to explain how they protect minors.
Character.AI later prohibited users under 18 from having open-ended conversations with its characters. In January, the company and Google agreed to settle lawsuits brought by families in Florida, Colorado, New York and Texas.
Disney has also had a direct dispute with the startup. In September 2025, Disney lawyers sent a cease-and-desist letter over chatbots that imitated Disney characters, and Character.AI removed them. This past September, Disney appointed Character.AI CEO Karandeep Anand as its first chief technology officer and said several Character.AI engineers would join him.
New products, then a warning to users
The bankruptcy filing came just 14 days after Character.AI introduced two new models. One was designed for roleplay and collaborative storytelling, while the other focused on faster, text-message-style exchanges. The company also launched a lower-priced subscription, c.ai lite, at $4.99 per month or $2.49 per week.
The company has acknowledged that the service is more than casual entertainment for some users. Character.AI directed users affected by the bankruptcy news to a support page containing mental-health resources. It pointed users toward Koko, a nonprofit offering free, anonymous five- to 10-minute courses on coping with stress and dark thoughts, as well as a directory of free helplines staffed by people.
The company’s page also suggested speaking with a supportive AI guide. The recommendation reflects the unusual relationship users can form with AI companions, which are designed to act like friends or partners and may retain details from earlier conversations.
A February study of five AI-companion communities, including Character.AI’s, found that some users reported grief comparable to losing a person when their companions disappeared after model updates or platform shutdowns. The prospect of Character.AI closing therefore raises questions not only about the fate of the business, but also about the characters and conversations users have built over time.
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The next stage for Character.AI will be determined in Delaware bankruptcy court. The targeted sale period is late November or early December, and the platform’s continued existence depends on whether a buyer agrees to keep it running.
