Character.AI Files for Bankruptcy as Disney Bids $20 Million, And Users Get Grief Resources
The chatbot app once valued at $1 billion is up for sale in a Delaware court, two weeks after launching new models. If nobody buys it, it shuts down.
Character.AI, the app where millions of people spend hours chatting with AI versions of fictional heroes and made-up partners, has filed for bankruptcy.
The company announced Monday that it started a voluntary Chapter 11 process, a type of U.S. bankruptcy that lets a company keep operating while a judge supervises how its debts get paid or how its assets get sold. The case was filed in the U.S. Bankruptcy Court for the District of Delaware.
Character.AI isn't trying to restructure its way back to health. It wants a court-supervised sale of all or substantially all of its assets, and if no bidder agrees to keep the service alive, the company said the platform "will be wound down", corporate speak for switched off.
Disney Worldwide Services, a unit of the Walt Disney Company, signed on before the filing as the "stalking horse" bidder, according to Character.AI's press release . In a bankruptcy auction, that is the opening offer that sets a floor every other buyer has to beat.
The media giant is offering $20 million for a non-exclusive, perpetual license to some of Character.AI's intellectual property and certain legal claims, plus transition services run by former Character.AI employees it has already hired. Non-exclusive means Disney gets to use that tech forever, but so can whoever else ends up buying it, and other bidders can still top the offer.
The company expects the sale to close in late November or early December. Character Technologies Inc., the company's legal name, estimated both its assets and its liabilities at $50 million to $100 million in its bankruptcy petition .
Three and a half years ago, Andreessen Horowitz led a $150 million funding round that valued Character.AI at $1 billion, with a16z partner Sarah Wang tweeting that "we are at the iPhone moment of AI." Founded in 2021 by former Google engineers Noam Shazeer and Daniel De Freitas, the app lets anyone build a chatbot with a personality and share it with others.
Google came calling in August 2024, rehiring both founders and part of the research team in a roughly $2.7 billion deal that also licensed Character.AI's technology. Silicon Valley calls this kind of arrangement an acqui-hire, buying the talent without technically buying the company, and Character.AI later largely abandoned building its own large language models, the AI engines that generate the chatbots' text.
Two months after the Google deal, Florida mother Megan Garcia sued Character.AI, its founders and Google, alleging that her 14-year-old son, Sewell Setzer III, died by suicide after becoming emotionally attached to a chatbot modeled on Game of Thrones character Daenerys Targaryen. More lawsuits from other families followed, and in September 2025 the Federal Trade Commission ordered Character.AI and six other tech companies to explain how they protect minors.
A month later, Character.AI banned users under 18 from open-ended chats with its characters, cutting off its core product for its youngest fans. In January, the company and Google agreed to settle lawsuits brought by families in Florida, Colorado, New York, and Texas.
In September 2025, Disney's lawyers sent Character.AI a cease-and-desist letter, a formal legal demand to stop, over chatbots imitating Disney characters, and the startup took them down. This past September, Disney named Character.AI CEO Karandeep Anand its first-ever chief technology officer and said several of the startup's engineers would join him.
Colin Adams, now Character.AI's CEO, said the company spent the past year trying to sustain the business amid "significant legal, regulatory, and operational headwinds" before the board chose a court-supervised sale.
Besides the legal hurdles, the company was burning too much money without reporting enough revenue, reporting “an operating loss of approximately $8-9 million per month.”
Character AI also struggled to raise more capital, which ended up making the whole operation unsustainable. “Notwithstanding the progress that has been made with regulators and personal injury claimants and enhancements to platform safety, Character has faced challenges in obtaining new investment capital,” Character AI CEO Collin Adams said in a sworn statement .
Character.AI also linked to a support page for anyone struggling with the news, a tacit admission that for some users the app is not just entertainment. AI companions, chatbots designed to act as friends or partners that remember past conversations, can become a daily emotional anchor for people who talk to them for hours.
The page points users to Koko, a nonprofit offering free, anonymous mini-courses of five to 10 minutes on coping with stress and dark thoughts, and to a directory of free helplines staffed by real people. Its very first suggestion, however, is a conversation with a "supportive AI guide," which is to say a chatbot to help people cope with losing their chatbots.
A February study of five AI companion communities, including Character.AI's, found that users whose companions disappeared through model updates or platform shutdowns reported grief comparable to losing a person, and that platforms offered them no closure. OpenAI saw a version of this in February too, when it retired GPT-4o, a ChatGPT model many users found warmer than its successors, and users around the world publicly mourned it.
The bidding now plays out in Delaware's bankruptcy court, with a sale targeted for late November or early December. If no buyer commits to keeping Character.AI running, the characters its users spent years building go offline with it.
