Character.AI, the chatbot app once valued at $1 billion, has filed for bankruptcy. The company started a voluntary Chapter 11 process on October 12 in the U.S. Bankruptcy Court for the District of Delaware.
Chapter 11 lets a company keep operating while a judge oversees how its debts are paid or its assets are sold. Character.AI is using the process to sell all or most of its assets.
The company said it hopes a buyer will keep the platform running. If no such bid comes in, the platform “will be wound down.”
Disney Makes the Opening Bid
Disney Worldwide Services, a unit of the Walt Disney Company, signed on as the “stalking horse” bidder before the filing. This is the opening offer that other buyers must beat in a bankruptcy auction.
Disney is offering $20 million for a non-exclusive, perpetual license to some of Character.AI’s intellectual property and certain legal claims. The deal also includes transition services run by former Character.AI employees that Disney has already hired.
Non-exclusive means Disney can use the technology forever, but so can any other buyer. Other bidders can still top the offer.
In September, Disney named Character.AI CEO Karandeep Anand as its first chief technology officer. Several of the startup’s engineers joined him.
Character Technologies Inc., the company’s legal name, estimated both its assets and liabilities at $50 million to $100 million in its filing.
Lawsuits and Money Losses
Former Google engineers Noam Shazeer and Daniel De Freitas founded Character.AI in 2021. In 2023, 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 worth about $2.7 billion. The deal also licensed Character.AI’s technology.
Two months later, Florida mother Megan Garcia sued the company, its founders and Google. She alleged her 14-year-old son died by suicide after becoming emotionally attached to one of the app’s chatbots.
More family lawsuits followed. In September 2025, the Federal Trade Commission ordered Character.AI and six other tech firms to explain how they protect minors.
A month later, Character.AI banned users under 18 from open-ended chats. In January, the company and Google agreed to settle lawsuits from families in Florida, Colorado, New York and Texas.
Current CEO Colin Adams said the company faced legal, regulatory and operational headwinds over the past year. In a sworn statement, he said the company had trouble getting new investment capital.
The company also reported an operating loss of about $8 million to $9 million per month.
On September 28, Character.AI launched two new chat models and a cheaper plan called (c.ai) lite. It costs $4.99 a month or $2.49 a week. Fourteen days later, the company filed for bankruptcy.
The company posted a support page for users who may struggle with the news. It points to Koko, a nonprofit offering free coping courses, and to a list of free helplines.
For now, the app remains online and paid subscriptions stay active. Billing is unchanged, and users can still export their chats or delete their accounts.
The bidding will now play out in Delaware’s bankruptcy court. Character.AI expects the sale process to be complete by the end of November or early December 2026.
