Character.AI Files for Bankruptcy, Agrees to Sell Assets to Disney

Character.AI, a prominent chatbot startup from the ChatGPT era, filed for Chapter 11 bankruptcy protection in the United States on Sunday. The company simultaneously agreed to sell certain assets to Disney for $20 million, with Disney serving as the stalking-horse bidder in a court-supervised auction.

Character Technologies, the parent company, listed estimated assets and liabilities between $50 million and $100 million each. Chief Executive Colin Adams stated the board determined this process offers the best opportunity to maximize value for stakeholders. The platform remains operational during proceedings.

“After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the company with the best opportunity to maximize value for all stakeholders.”

Founded in 2021 by former Google researchers Noam Shazeer and Daniel De Freitas, the startup reached a $1 billion valuation in 2023 despite having no revenue. Google paid $2.7 billion in 2024 to license Character.AI's technology and rehire the founders, though Shazeer later moved to OpenAI.

The company faced significant legal headwinds, including a lawsuit from a Florida mother alleging her 14-year-old son died by suicide after interactions with chatbots. That suit settled last year, but litigation from other families and the states of Kentucky and Pennsylvania followed.

In a blog post, Character.AI told users the service remains available, subscriptions continue unchanged, and data privacy rules stay in effect. The sale is expected to close by late November or early December.