Character.AI files for bankruptcy and reaches $20 million asset deal with Disney

Oct 14, 2:52 PM2 min readCovered by 3 outlets

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AI startup Character.AI seeks Chapter 11 protection as it faces rising litigation and development costs, while Disney moves to license its technology for $20 million.

AI companion startup Character.AI filed for Chapter 11 bankruptcy protection on Monday, citing high development costs and legal liabilities including a lawsuit over child safety.

The startup, which allows users to roleplay with AI-generated characters, filed for protection in the Delaware District bankruptcy court, reporting assets and liabilities between $50 million and $100 million. According to International, the company stated that the evolving field of AI entertainment has become too expensive to sustain, resulting in insufficient cash flows to support the business in its current form.

CEO Colin Adams said in a statement that a court-supervised sale is the best path to maximize value for stakeholders. As part of this process, Reuters and other outlets reported that Disney has agreed to act as a stalking horse bidder, offering $20 million for a non-exclusive license of the startup's intellectual property and certain assets. TechCrunch noted that Disney will also provide transition services via former Character.AI employees who recently joined the media giant.

The bankruptcy follows significant legal pressure, including a lawsuit from the state of Kentucky alleging the platform led children toward self-harm. While Adams expects the platform to remain operational through the sale process, he cautioned that it could be wound down if no bid for continued operations emerges. The sale is expected to close by late November or early December.

The company's history includes a 2024 deal where Google licensed its technology and rehired co-founders Noam Shazeer and Daniel De Freitas. International reported that although the platform has amassed a large user base since its founding, it has struggled with regulatory and operational headwinds over the past year.

Background

Founded in late 2021 by former Google engineers, Character.AI reached a unicorn valuation in 2022 after raising $150 million. In August 2024, Google struck a $2.7 billion licensing deal with the startup, which saw its founders return to the search giant.