Character.AI Files for Chapter 11 as Disney Offers $20 Million for a License to Its Tech

Character.AI filed for Chapter 11 bankruptcy in Delaware on October 12, 2026 to sell itself under court supervision, and the company says its chatbot platform will be wound down if no workable bid emerges. Disney has agreed to be the opening bidder, offering $20 million for a non-exclusive perpetual license to certain Character.AI intellectual property, according to the company's press release.

The bankruptcy comes two years after the startup's biggest AI business deal: in August 2024, Google licensed Character.AI's models in a deal TechCrunch puts at $2.7 billion and rehired its cofounders, Noam Shazeer and Daniel De Freitas. Since then the app, where users chat and roleplay with AI characters, has faced lawsuits over harm to teenagers, an investigation in Texas and a cease and desist letter from the same Disney that is now bidding.

What did Character.AI announce?

Character.AI said on October 12, 2026 that it had started a voluntary Chapter 11 case to pursue a court-supervised sale of all or substantially all of its assets, while keeping the platform running. Chapter 11 is the part of the US Bankruptcy Code that lets a company keep operating while it restructures or sells itself under a judge's oversight.

The case of Character Technologies, Inc., the company behind Character.AI, is No. 26-11603 before Judge Brendan Linehan Shannon in the US Bankruptcy Court for the District of Delaware, according to the claims agent's case page. CEO Colin Adams signed the petition. The company listed estimated assets and liabilities between $50 million and $100 million, according to TechCrunch.

The company expects the sale to be complete by the end of November or perhaps early December 2026, it said in a blog post.

We hope that the sale process will yield an actionable proposal that will allow continued operations of the Character.ai platform. If such a bid is unavailable, however, the platform will be wound down.

What is Disney offering for Character.AI's technology?

Disney Worldwide Services agreed before the filing to pay $20 million for a non-exclusive perpetual license to certain Character.AI intellectual property and certain company claims, and to provide transition services using former Character.AI employees it has hired, Character.AI said on October 12, 2026. The offer is subject to higher or better bids under Section 363 of the Bankruptcy Code, which governs asset sales during a bankruptcy.

Character.AI has asked the court to approve bidding procedures and to name Disney as the stalking horse purchaser for those assets. Neither the press release nor the blog post says which technology or claims the license covers; The Verge describes them as undisclosed assets and unspecified intellectual property. Because the license is non-exclusive, the deal as described would not give Disney sole rights to what it licenses.

Why is Disney bidding on a company it once accused of misusing its characters?

Disney's bid follows its hiring of Character.AI's former CEO, Karandeep Anand, as its first chief technology officer, a move Variety reported on September 18, 2026, effective October 2. Disney said at the time that it expected "a number of Character.AI's technical team" to join as well.

The relationship started on hostile terms. In September 2025, Disney sent Character.AI a cease and desist letter accusing it of letting chatbots misuse Disney characters, and Character.AI removed them (Axios via Ars Technica). Anand had run Character.AI since June 2025, according to TechCrunch.

Why did Character.AI end up in bankruptcy?

Character.AI told the court that AI entertainment "has proven to be costly to develop and grow," and that those costs, combined with potential litigation liabilities and regulatory engagement, left it unable to generate enough cash to support the business, according to CNBC.

These high costs, coupled with potential litigation related liabilities and regulatory engagement have contributed to the Debtor's inability to generate sufficient cash flows to support its business in the present form.

The legal pressure grew after the Google deal. Character.AI was sued after the suicide of Sewell Setzer III, a 14-year-old in Florida whose mother says he became obsessed with one of its chatbots, and Texas opened an investigation into the platform, according to TechCrunch. In January 2026, Google and Character.AI agreed in principle to settle with families in lawsuits over teen suicide and self-harm, TechCrunch reported on January 7. Kentucky sued the company the same month, alleging its chatbots encouraged self-harm (CNBC), and Pennsylvania claims its chatbots posed as licensed doctors (Ars Technica). The company has since added safety features and banned minors from the platform, TechCrunch reports.

Who is Character.AI's biggest creditor?

Google, which licensed Character.AI's models for a reported $2.7 billion in 2024, is now the largest unsecured creditor named in the bankruptcy petition, with a trade payable of $4,148,944. The petition does not say what the payable is for.

Next on the list of the 20 largest unsecured claims are the law firm Hogan Lovells at $2,125,026, DigitalOcean at $1,953,100 and Fireworks.ai at $813,900. The Commonwealth of Pennsylvania, the Commonwealth of Kentucky and a minor plaintiff whose name is redacted are listed as litigation claims, each marked contingent, unliquidated and disputed, with the amount unknown.

	Amount	Source
Total venture funding raised	More than $193 million	PitchBook via TechCrunch
Google model license, August 2024	$2.7 billion (reported)	TechCrunch
Estimated assets and liabilities at filing	$50 million to $100 million	Court filing via TechCrunch
Largest unsecured claim (Google)	$4,148,944	Bankruptcy petition
Disney's opening bid for a license	$20 million	Character.AI press release

By that measure, Disney's opening offer works out to less than 1% of what Google paid for its license two years earlier.

What we don't know yet

• Which technology, data and claims Disney's license would cover, and whether Disney or anyone else would keep the platform running.
• Whether a rival bidder will top the $20 million offer, and on what deadlines once the court rules on the bidding procedures.
• How the pending claims from Kentucky, Pennsylvania and individual plaintiffs will be treated in the sale.
• What happens to user chat histories if the platform is wound down.