Character.AI files for bankruptcy

Character.AI, one of the first breakout startups of the generative AI boom, has filed for bankruptcy and is selling some of its assets to Disney. The company, which builds various online bots for users to chat or roleplay with, has faced mounting scrutiny and lawsuits over the safety of its chatbots, but has continued releasing updates and products in recent months.

In a press release and blog post published Monday, Character said it had filed for Chapter 11 bankruptcy protection in the US to facilitate the sale of the company and its assets. “Over the past year, we’ve taken meaningful steps to sustain and improve our business amid significant legal, regulatory, and operational headwinds,” the company said.

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

Disney’s involvement comes shortly after the entertainment behemoth hired Character.AI’s former CEO Karandeep Anand as chief technology officer, part of its growing push into AI. Anand’s tenure as Character CEO lasted just over a year and during that time he oversaw the company’s move into microdramas. Disney has previously complained that Character was damaging its brand and exploiting its intellectual property by allowing unauthorized chatbots of its characters, including sending cease and desist letters.

Along with Anand, Disney also said it expected “a number of Character.AI’s technical team” to join the company. The move resembles a kind of “acquihire” strategy that has become increasingly common in Silicon Valley as a means of hoovering up startups’ talent that sometimes leaves the original company struggling to survive. Character.AI has survived it once already — Google spent over $2 billion to hire away much of the company’s talent, including co-founders Noam Shazeer and Daniel De Freitas, in 2024.

Character said it expects the sale process to be completed by late November or early December and plans to continue operating its services, including paid subscriptions, in the meantime. However, the company warned that “the platform will be wound down” if a suitable bid does not emerge. “As we navigate this process, maintaining a safe and engaging experience for our community remains a top priority,” it said.

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