Character.AI files for Chapter 11 bankruptcy, Disney to acquire assets for $20 million

Character.AI, an interactive chatbot platform that lets users create and converse with AI characters, filed for Chapter 11 bankruptcy on October 13, 2026, just five years after its founding. The company disclosed in court documents that its assets and liabilities fall between $50 million and $100 million. In a statement, CEO Colin Adams said the board determined a court-supervised sale process would provide the best opportunity to maximize value for stakeholders.

Disney agreed to acquire some of Character.AI’s assets for $20 million, including a non-exclusive perpetual license for its technology. The deal also involves transition services provided by former Character.AI employees who joined Disney last month, alongside the company’s former CEO Karandeep Singh Anand. Adams noted that Character.AI would continue operating during the sale process, which is expected to close in late November or early December. However, he emphasized there is no confirmed bid for the company’s remaining assets, and the platform may be wound down if no suitable proposal emerges.

Character.AI was founded in late 2021 by former Google engineers Noam Shazeer and Daniel De Freitas, both co-authors of the landmark Transformer paper. The startup initially focused on training foundation models and developed a platform where users could create custom AI characters. By September 2022, Character.AI reached a unicorn valuation of $150 million after raising $150 million, citing high demand and over 2 billion messages exchanged with its bots in five months. Active users were averaging more than two hours on the platform daily at the time.

The company’s trajectory shifted in August 2024 when Google struck a $2.7 billion deal to license Character.AI’s models. Following the acquisition, Shazeer and De Freitas returned to Google, and the startup’s general counsel, Dominic Perella, became interim CEO. Character.AI pivoted away from training foundation models to focus on growth, recording 20 million monthly active users by October 2024. However, the company faced legal and regulatory challenges, including lawsuits following the suicide of a 14-year-old Florida boy whose mother alleged he became obsessed with a chatbot on the platform. Texas also launched an investigation into the platform’s compliance with child privacy and safety laws.

Character.AI settled some of the lawsuits, added safety features, and banned minors from its platform. In June 2025, the company appointed Karandeep Singh Anand, a former Brex and Meta executive, as CEO and expanded its products to include AI video generation and social feeds. The company introduced interactive storytelling formats and microdramas to boost user engagement, but these efforts were insufficient to address sustainability challenges.

The company has raised over $193 million in funding from investors including Lightspeed, SV Angel, Greycroft, and a16z, according to PitchBook. Despite its early success and high user engagement—ranked among the top apps in time spent by analytics firm Sensor Tower—Character.AI struggled with rising AI compute costs and monetization pressures. High engagement proved a double-edged sword, as increased usage drove up operational expenses while creating pressure to generate revenue.