Character.AI files for Chapter 11 bankruptcy and sells assets to Disney

Character.AI, an early breakout startup in the generative AI boom known for its user-facing chatbots and roleplaying bots, has filed for Chapter 11 bankruptcy protection in the U.S. The company cited "significant legal, regulatory, and operational headwinds" in a press release and blog post announcing the filing. In its bankruptcy documents, Character.AI listed estimated liabilities between $50 million and $100 million.

As part of a proposed sale, Disney would serve as the lead bidder for certain unspecified assets of Character.AI. The agreement includes a $20 million payment for those assets, as well as transition support involving former Character.AI employees hired by Disney. Disney would also receive a nonexclusive license to unspecified intellectual property. The proposed sale is expected to be completed by late November or early December, according to the company.

Character.AI has faced mounting scrutiny and lawsuits over the safety of its chatbots, which has persisted despite ongoing product updates and releases. The company emphasized in its announcement that maintaining a safe and engaging experience for its community remains a priority during the bankruptcy process.

Disney’s involvement follows the hiring of Character.AI’s former CEO, Karandeep Anand, as its chief technology officer as part of the entertainment giant’s broader push into AI. Disney had previously issued cease-and-desist letters to Character.AI over unauthorized chatbots of its characters, alleging brand damage and intellectual property exploitation.

The proposed transaction resembles an acquihire strategy, where Disney would absorb a number of Character.AI’s technical team members. This approach has become more common in Silicon Valley as larger firms seek to acquire talent from struggling startups. Character.AI has previously experienced a significant talent drain, including co-founders Noam Shazeer and Daniel De Freitas, who were hired by Google in 2024 for over $2 billion.