Character.ai, the app that lets millions of people chat with artificial intelligence (AI) characters, has filed for Chapter 11 bankruptcy protection so it can sell its business under court supervision. Character Technologies, the company behind the app, made the voluntary filing in the United States Bankruptcy Court for the District of Delaware, it said on 12 October. It plans to keep the platform running while it looks for buyers.
Disney, the first bidder, has agreed to pay $20M for a perpetual, non-exclusive licence to some of Character.ai’s intellectual property and to certain legal claims the company holds. On top of the cash, Disney would provide transition services using former Character.ai employees it has already hired. Other bidders can still top the offer at auction.
Character.ai expects the sale to finish in late November or early December. If no buyer comes forward who wants to keep the app going, the company says it will wind the platform down, so Disney’s bid on its own buys rights to technology and not the service users log into.
What Disney’s Bid Covers
Disney is acting as what bankruptcy lawyers call a stalking horse: the first bidder, whose offer sets a floor price that rivals must beat at auction. The sale runs under section 363 of the federal Bankruptcy Code, which lets a company sell assets outside its normal business once a judge approves, and which can allow a buyer to take them free of old claims.
Alongside the sale, Character.ai has asked the court to approve its bidding rules and has filed routine first-day requests to keep paying staff, honour its commitments to users and pay vendors and partners. Wilson Sonsini Goodrich & Rosati is its legal counsel, Areté Partners its restructuring adviser and Houlihan Lokey its investment banker. The law firm Skadden, Arps, Slate, Meagher & Flom represents Disney.
A non-exclusive licence lets Disney use the technology while Character.ai, or whoever buys the rest of the company, keeps the right to license it to others. As described, the bid does not include the app, its user accounts or its subscription business, and the announcement does not spell out which intellectual property or which legal claims the licence includes.
Colin Adams, Character.ai’s chief executive, said in a statement that “over the past year, Character.ai has taken meaningful steps to sustain and improve its business”.
He added that the board, after reviewing the alternatives, had concluded that a court-supervised sale gave the company its best chance to maximise value for its stakeholders, and that maintaining a safe and engaging experience for users remains a priority during the process.
The Chief Executive Who Joined Disney
Less than four weeks before the filing, Disney named Karandeep Anand, then Character.ai’s chief executive, as its first company-wide chief technology officer. Anand reports to Disney chief executive Josh D’Amaro and started on 2 October. Disney said at the time that a number of Character.ai’s technical team members were also expected to join the company. Neither company has said how many people have moved.
Anand had run Character.ai since June 2025, after working as a vice president at Meta and as president of Brex, a corporate card and spending startup. A year before his move, Disney’s lawyers had sent Character.ai a cease-and-desist letter accusing it of “freeriding off the goodwill of Disney’s famous marks and brands” by hosting user-made chatbots based on Disney characters. Character.ai removed Mickey Mouse, Captain America, Luke Skywalker and other Disney characters from search soon afterwards, and no lawsuit followed.
In December 2025, Disney signed a three-year deal with OpenAI that lets OpenAI’s Sora video app create more than 200 Disney, Marvel, Pixar and Star Wars characters, and Disney made a $1B equity investment in OpenAI as part of the arrangement. The Character.ai licence is a different kind of deal, because it covers Character.ai’s own intellectual property rather than Disney’s characters.
From $1B Valuation To A Court Sale
Noam Shazeer and Daniel De Freitas, both former Google engineers, founded Character.ai in 2021. Shazeer co-wrote the 2017 research paper that introduced the transformer, the design behind the AI systems that power chatbots such as ChatGPT, and De Freitas had led Google’s Meena and LaMDA chatbot projects. In March 2023 the startup raised $150M at a $1B valuation in a round led by the venture firm Andreessen Horowitz. By early 2025 it had about 20M monthly users, according to the technology publication The Information.
The founders returned to Google in August 2024 under a deal in which Google took a non-exclusive licence to Character.ai’s technology and hired them along with some of their team. Google paid about $2.7B, the Wall Street Journal later reported, and in May 2025 Bloomberg said that the Department of Justice had opened a preliminary antitrust probe into whether the deal was structured to avoid merger review. Google said it had no ownership stake in Character.ai, which remained a separate company. Disney’s bid echoes that structure on a far smaller scale, pairing a licence with staff who have already moved.
After the founders left, Character.ai stopped building its own AI models and turned to open-source ones from Meta and the Chinese lab DeepSeek, The Information reported in August 2025. By then it was also exploring a sale or new funding, with yearly revenue running at about $30M, mostly from subscriptions. Big Tech deals for AI startups do not always hold, as Manus found when Beijing unwound its sale to Meta. In Europe, meanwhile, a rising share of startups now sell for less than a year’s revenue.
An App That Changed Under Pressure
For users, Character.ai is a place to talk to characters other people have created, from fictional heroes to study helpers and invented companions. The company now calls itself an AI entertainment platform with four formats (Chat, Books, Series and Comics) and sells a paid tier, c.ai+ (c.ai is the company’s own shorthand for Character.ai), which launched in 2023 at $9.99 a month with priority access.
In July 2026 Character.ai launched c.ai Series, studio-made AI drama episodes for users aged 18 and over. The app tracker Sensor Tower found that users spent more than 950 minutes a month on average in the app during the first half of 2026.
The sharpest change came for teenagers: in late October 2025, Character.ai said it would end open-ended chat for users under 18, cutting their time to two hours a day and then to zero by 25 November. It checks ages with an in-house age-assurance model backed by Persona, an identity-verification company, and from 25 November it offered users under 18 Stories, a guided format for building interactive fiction, in place of free conversation.
Lawsuits And Regulators
The shift for teenagers followed a run of lawsuits from families. The first widely reported case, filed in Florida in October 2024 by Megan Garcia, alleged that a Character.ai chatbot contributed to the death of her 14-year-old son, and it named Google and both founders alongside the company. In May 2025 a federal judge largely rejected the defendants’ bid to dismiss the case, letting the claims against Google proceed, and declined at that stage to treat chatbot output as protected speech.
In January 2026, Character.ai and Google reached settlements in principle with families in Florida, New York, Colorado and Texas, without disclosing the terms. Kentucky’s attorney general, Russell Coleman, sued the company that same month in what was reported as the first state lawsuit against it, and Pennsylvania sued in May over a chatbot that allegedly presented itself as a licensed psychiatrist.
In September 2025, the Federal Trade Commission ordered seven companies, including Character.ai, Alphabet, Meta, OpenAI, Snap and xAI, to explain how they test and monitor AI chatbots that act as companions, particularly for children. Since 1 January 2026, California’s companion-chatbot law, Senate Bill 243, has required operators to tell users they are talking to AI and to have suicide-prevention protocols in place.
Seven Weeks To Find A Buyer
For now the app stays online, and users can keep chatting while Character.ai’s bankers look for higher offers. The announcement does not say how pending claims, including the state lawsuits, will be handled, and the court papers listing the company’s debts and creditors had not been widely reported at the time of writing.
Character.ai was one of the first consumer AI apps to find a mass audience, and the only public bid so far is for its technology and its people, not for running the service. If no buyer steps in to run the service, the company has said it will close the platform.
