Character.AI Says Disney Required Bankruptcy to Complete Deal, Citing Cash Burn and Litigation Risk

Since Character.AI filed for Chapter 11 protection in Delaware on Oct. 12, court filings have made clear that the Disney arrangement is not a simple asset sale. It is a deal built in two steps, with the bankruptcy as the second.

According to the filings, the transactions are "two interrelated and integrated" pieces. The first closed in September, before any petition. Disney paid Character.AI $5.5 million, plus a refundable $2 million "good faith deposit." It also hired the "majority" of Character.AI's employees, including then-CEO Karandeep Anand, who now serves as Disney's chief technology officer.

Disney also agreed to let some of those newly hired employees help keep the platform running for five months.

The second step is the bankruptcy sale. Disney is the "stalking-horse" bidder, meaning the opening offer, at $20 million for a nonexclusive, perpetual license to certain Character.AI intellectual property and claims. Other bidders can top it. Character.AI expects to close the sale of all its assets by late November or early December.

Why the company says it went to court

A motion filed by Character.AI's lawyers says Disney required the deal to be "fully consummated" through bankruptcy proceedings. The stated reasons were the company's "diminishing cash reserve and significant litigation and regulatory risks."

A Character.AI spokesperson referred questions about whether the deal was contingent on a bankruptcy filing to Disney. Disney declined to comment.

The cash problem is documented. Court papers put the monthly operating loss at roughly $8 million to $9 million. The company reports about 12 million monthly active users and revenue of about $23.6 million in fiscal 2025. It listed estimated assets and liabilities of $50 million to $100 million.

If no bid is sufficient to keep the platform going, the company says it will wind it down.

The legal claims stay behind

Wired, reviewing the filings, reads the structure as leaving whatever remains of Character.AI responsible for its legal fights. It describes the arrangement as a new twist on a "reverse acquihire," where a buyer takes the staff and a technology license and the target is left as a shell. That is Wired's characterization. Neither company has used the term.

The liabilities are real. Kentucky has sued, alleging the company's chatbots encouraged users to cut, starve or kill themselves. Pennsylvania has sued, alleging its chatbots posed as doctors. Private suits allege the bots pushed children toward suicide and self-harm, including the case brought by Florida mother Megan Garcia over the death of her 14-year-old son, Sewell Setzer III.

Character.AI reached preliminary settlements in five private cases in January. Recent court documents in those cases show the settlements have not been finalized or paid. Terms were never disclosed.

Matthew Bergman, founder of the Social Media Victims Law Center, which represents several of the families, declined to comment on the filing.

What Character.AI and Disney say

Character.AI's position is that bankruptcy is the way to resolve those claims, not escape them. In a declaration, its newly appointed CEO, Colin Adams, said the goal is a "consensual resolution" with personal injury claimants and a group of states investigating the company, while maximizing asset value for shareholders.

The company's board said after "a comprehensive review of our available alternatives" that a court-supervised sale offers "the best opportunity to maximize value for all of our stakeholders." The company said paid subscriptions remain active and billing is unchanged for now.

Disney has said only that it hired several Character.AI technical staff and that Anand would lead efforts to modernize how it builds and delivers technology across the company. Disney's newly installed CEO, Josh D'Amaro, has been steering the company toward heavier AI use, according to recent internal memos.

A familiar template at a much smaller price

In August 2024, Google paid about $2.7 billion in cash for a nonexclusive license to Character.AI's language model technology and rehired founders Noam Shazeer and Daniel De Freitas. That deal also served as a liquidity event for shareholders. All of Character.AI's equity holders at the petition date are current or former directors or employees.

Disney's offer is $20 million for a license, with the staff already on its payroll.

Wired notes that companies often take the position that reverse acquihires are not mergers and need no notice to federal antitrust regulators. It also notes that Congress has criticized such arrangements. No regulator has announced a challenge to the Disney deal.

What comes next

The open question is whether a rival bidder appears to challenge Disney's $20 million opening offer before the sale closes in late November or early December. The second is how the court treats the unfinalized settlements, the Kentucky and Pennsylvania suits and the multistate investigation while the company's remaining assets are sold. Character.AI says it hopes to resolve all of them in a single proceeding.