Character.AI files for Chapter 11 with Disney as $20 million opening bidder for some assets

Character Technologies Inc., the parent of the Character.AI chatbot platform, filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the District of Delaware on Monday, Oct. 12. The company is seeking a court-supervised sale of all or substantially all of its assets.

Disney is first in line. Before the filing, the company signed a deal under which Disney Worldwide Services will serve as the stalking horse bidder, meaning its offer sets the minimum that other bidders have to beat.

What Disney is offering

Disney's bid is $20 million for a non-exclusive, perpetual license to certain Character.AI intellectual property and certain company claims. Disney will also provide transition services using former Character.AI employees it has already hired.

Those services are meant to help the platform operate safely for a limited time while the sale runs. The deal is subject to higher or better offers under section 363 of the Bankruptcy Code.

Character.AI has asked the court to approve its bidding procedures, including Disney's stalking horse status. The company expects the sale to close in late November or early December 2026.

The Disney tie is not new. In late September 2025, Disney sent Character.AI a cease-and-desist letter demanding it remove chatbots that used Disney characters. Last month, Disney named Karandeep Anand, then Character.AI's CEO, to a newly created post as chief technology officer.

The numbers

In its court filing, Character Technologies estimated both assets and liabilities at between $50 million and $100 million.

The company was valued at about $1 billion in 2023. In 2024, Google paid a reported $2.7 billion for a non-exclusive license to its technology and rehired founders Noam Shazeer and Daniel De Freitas, who started the company in 2021. After that deal, Character.AI said it would stop building its own large language models and focus on consumer products.

Keeping the lights on

The app remains online. Paid subscriptions are active and billing is unchanged for now, the company said, and it will notify subscribers in advance if paid features change. Users can delete their accounts or export their data.

First-day motions ask the court for permission to keep paying wages and benefits, honor commitments to users and pay vendors. If the process does not produce a buyer willing to operate the platform, the company said it will wind the service down.

CEO Colin Adams framed the filing as a value play. "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," he said. He said the company had taken "meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds."

The company did not spell out what those headwinds were.

The litigation behind the filing

The legal record is long. Families sued Character.AI alleging its chatbots contributed to mental-health crises among teenagers, including cases involving teens who died by suicide or self-harmed. One Texas suit alleged a chatbot encouraged a teenager to kill his parents over screen-time limits. Those are the families' allegations.

Character.AI and Google agreed in principle earlier this year to settle several of those cases. The terms were not disclosed. The company had already barred users under 18 from open-ended conversations with its chatbots, a change announced last year.

The legal pressure has continued since. The company has faced additional claims from families and U.S. states. In May 2026, Pennsylvania sued, alleging a chatbot presented itself as a licensed psychiatrist.

The filing does not say how those claims will be treated in the bankruptcy. Disney is buying a license to "certain company claims," and the filing does not detail what those claims are.

What comes next

The court must approve the bidding procedures before any auction is scheduled. Anyone who wants to top Disney's $20 million has to do so inside that process.

The open question is whether any bidder wants the consumer app itself, with its teen-safety litigation history, or whether Disney's license is the only value anyone sees in the company. If no one steps up to operate the platform, Character.AI has said the service goes dark.