Character.AI Files for Bankruptcy, With Disney as First Bidder at $20 Million

Character.AI filed for Chapter 11 bankruptcy protection in the United States on Monday, October 12, starting a court supervised sale of a business that was valued at 1 billion dollars only a few years ago. In its court filing, the company estimated its assets and its liabilities at between 50 million and 100 million dollars each.

Walt Disney has stepped in as the first bidder. Disney agreed to pay 20 million dollars for some of the company assets, including a non exclusive perpetual license for its technology, and to serve as the stalking horse bidder whose offer sets the floor for an auction. Character.AI is seeking court approval for the auction rules, and it expects the sale process to end in late November or early December.

The platform stays up, for now

The company says it intends to keep operating during the sale, with minimal disruption for users. Chief executive Colin Adams said the board had reviewed its options and decided that a court supervised sale gives the company the best chance to preserve value for everyone with a stake in it. He also gave a clear warning. If no bid arrives that keeps the platform running, the platform will be wound down.

Disney will provide transition services through former Character.AI employees it hired last month. Among them is Karandeep Anand, who was brought in as Character.AI chief executive last year to improve its record on safety and who is now a chief technology officer at Disney.

A fast rise

Two former Google engineers, Noam Shazeer and Daniel De Freitas, founded the company in late 2021. Shazeer is a co author of the Transformer paper that underpins modern AI. The service lets users create AI characters and hold long conversations with them, and it grew fast. It reached a 1 billion dollar valuation after a 150 million dollar funding round, with users spending more than two hours a day on the platform on average.

In August 2024, Google struck a 2.7 billion dollar deal to license the company models, and both founders returned to Google. The platform still reached 20 million monthly active users by October 2024. PitchBook figures put its total fundraising at more than 193 million dollars.

Lawsuits over teen safety

The legal pressure built after a death in Florida. In 2024, Megan Garcia sued the company, alleging that the platform was responsible for the suicide of her 14 year old son, Sewell Setzer III. Other families filed suits of their own, accusing the platform of serving sexual content to children or encouraging suicide, self harm or violence. The company settled five cases, including the Garcia case, earlier this year. Texas also opened an investigation into whether the platform met child privacy and safety laws.

The company answered with safety changes. It added pop ups that point users to mental health resources, and it barred users under 18 from open ended back and forth chats with its bots, allowing them only to create one time stories or videos.

The filing landed in the same week that eight US states sued OpenAI over the safety of ChatGPT for children. Together, the two cases show how quickly the legal bill for consumer AI has come due.