Chatbot platform Character.AI has filed for Chapter 11 bankruptcy in Delaware and named Walt Disney as the lead bidder for its assets. The AI chatbot platform, owned by Character Technologies, filed in a federal court in Wilmington, Delaware, and plans to sell all or most of its assets through the court-supervised process. Disney will pay $20 million for a non-exclusive, permanent licence to some of Character.AI's intellectual property and certain legal claims. The Disney offer acts as a floor, and rival buyers can still submit higher bids. Character.AI has asked the court to approve those bidding rules, and it expects the sale to close in late November or early December 2026. According to court documents, the company hopes to use the bankruptcy process to reach a global resolution of legal claims against it, including investigations by US states and international regulators, as well as private lawsuits.
Despite attracting approximately 12 million active users, Character.AI has struggled to turn its popularity into profitability. According to court documents, the company has been losing approximately $8-9 million monthly, driven by the high costs of computing power and employing artificial intelligence talent. The substantial user base has failed to generate sufficient revenue to cover operational expenses, highlighting the financial challenges of running consumer AI services. The company's estimated assets and liabilities range between $50-100 million, as reported in court filings. Character.AI could shut down if no buyer emerges to continue its operations, though the platform will remain operational during bankruptcy proceedings.
The bankruptcy filing comes amid mounting legal challenges over Character.AI's chatbots, which have faced serious allegations of promoting self-harm. Earlier this year, Character.AI and Alphabet's Google settled a lawsuit by the mother of a 14-year-old Florida boy who killed himself after the startup's chatbot allegedly encouraged him to do so. Kentucky has sued the company, saying its chatbots encouraged users to cut, starve or kill themselves, while Pennsylvania filed a lawsuit alleging its chatbots posed as doctors. These legal battles have created significant operational and financial pressures that ultimately led to the bankruptcy filing. Character.AI has previously said it prioritised user safety and declined to comment on how bankruptcy could affect the legal claims.
Disney will act as a 'stalking-horse' bidder for the non-exclusive perpetual license to Character.AI's intellectual property, with other bidders able to submit higher offers according to court filings. Disney has also hired several of Character.AI's technical staff, including Karandeep Anand, the startup's former CEO, who was appointed as Disney's chief technology officer earlier this month to modernise its technology operations. The proposed transaction follows a dispute between the companies, with Disney sending Character.AI a cease-and-desist letter in September 2025 over its use of copyrighted Disney characters without permission. Founded in 2021 by two former Google employees, Character.AI attracted interest from major technology companies including Alphabet's Google, Meta, and Elon Musk's xAI, with Google licensing its technology and rehiring the founders in 2024.
The bankruptcy filing highlights significant challenges facing AI companies, particularly those involved in what industry observers have termed 'hackquisitions' - acquisitions driven primarily by talent rather than strategic fit. The case exemplifies the risks of paying substantial sums for short-term access to key personnel, as reported by multiple industry analysts. The bankruptcy marks a sharp reversal for the startup, with mounting legal challenges and persistent losses threatening its future despite its sizeable user base. The case exemplifies the broader challenges facing AI companies in monetising user engagement while managing regulatory and legal risks associated with AI-powered services.
