Character.AI Files for Bankruptcy, Sells Assets to Disney

Character.AI, one of the pioneering startups in the generative AI space, has filed for bankruptcy and is selling its assets to The Walt Disney Company. This move comes after years of facing intense scrutiny and lawsuits over the safety concerns surrounding its chatbots. Despite these challenges, Character.AI continued releasing updates and products in recent months.

The company’s decision to file for Chapter 11 bankruptcy protection in the US will facilitate the sale of its assets, including intellectual property and technical expertise. In a press release and blog post published on Monday, Character said it had taken steps to sustain and improve its business despite significant legal, regulatory, and operational hurdles. The company acknowledged that these challenges have been ongoing for over a year.

The bankruptcy filing lists estimated liabilities between $50 million and $100 million. As part of the proposed sale, Disney will serve as the lead bidder for Character.AI’s assets, setting a baseline for competing offers. In exchange, Disney will pay $20 million for certain undisclosed assets and provide transition support using former Company employees it has hired. Additionally, Disney will receive a nonexclusive license to unspecified intellectual property.

Disney’s involvement in this deal is not surprising given its recent hiring of Character.AI’s former CEO Karandeep Anand as chief technology officer. This move is part of the entertainment giant’s growing push into AI and follows Anand’s tenure at Character.AI, which lasted just over a year. During his time there, he oversaw the company’s expansion into microdramas. Disney has previously complained about Character.AI damaging its brand by allowing unauthorized chatbots of its characters, including sending cease and desist letters.

Along with Anand, Disney expects ‘a number of Character.AI’s technical team’ to join the company as part of this deal. This move resembles a common strategy in Silicon Valley known as an acquihire, where companies acquire startups primarily for their talent rather than their products or technology. Character.AI has survived one such attempt before - Google spent over $2 billion to hire away much of its talent, including co-founders Noam Shazeer and Daniel De Freitas, in 2024.

Character.AI expects the sale process to be completed by late November or early December and plans to continue operating its services, including paid subscriptions, until then. However, if a suitable bid does not emerge, the company warned that ‘the platform will be wound down.’ The company emphasized maintaining a safe and engaging experience for its community remains a top priority as it navigates this process.