Character.AI files for bankruptcy as Disney offers $20M for a tech license

Character.AI, the app where users chat with AI characters, has filed for bankruptcy, with Disney making an opening $20 million offer for a license to some of its technology.

In its October 12 announcement, Character.AI said it had begun a voluntary Chapter 11 process to arrange a sale overseen by the bankruptcy court. It warned that the platform would wind down without a proposal supporting continued operations.

What Disney’s offer covers

Character.AI said its proposed agreement with Disney Worldwide Services covers a nonexclusive, perpetual license to certain intellectual property and certain company claims. Disney would pay $20 million and provide transition services through former Character.AI employees it had hired.

The company is seeking court approval for bidding procedures that would allow higher or better offers to replace the Disney proposal.

An early breakout facing safety disputes

In June 2024, Character.AI said it was serving about 20,000 queries a second. TechCrunch reported that Sensor Tower ranked the app highly for time spent, and that Google paid $2.7 billion in 2024 to license its technology and rehire founders Noam Shazeer and Daniel De Freitas.

Disney sent a cease and desist letter in September 2025 over unlicensed versions of its characters, Ars Technica reported. Character removals followed. Former Character.AI CEO Karandeep Anand later joined Disney as CTO.

Ars also reported a settlement in a lawsuit over a teenager’s death by suicide. Other ongoing lawsuits allege that bots encouraged self-harm and posed as doctors.

Why it matters

Character.AI was an early consumer AI breakout, but its popularity and valuable technology did not ensure a sustainable business. Its 2024 traffic figures do not show whether it could cover its costs in 2026. How much safety litigation contributed to the filing remains unclear.

Disney now has a chance to secure rights to technology from a company it previously threatened with legal action and whose former CEO it hired. Its proposed license could go ahead even if the platform closes. Users and character creators need a buyer willing to keep the service running.

In October 2025, Character.AI announced that users under 18 would lose access to open conversations with AI by November 25 that year. It outlined other creative experiences for younger users involving videos, stories and streams, alongside measures to check ages.

That plan would remove the app’s central feature for that age group. Character.AI acknowledged questions about how those chats affect teenagers even when content controls work properly. A buyer seeking to operate the platform would have to decide which ages and experiences it can responsibly serve and how to check users’ ages.

Character.AI said in its October 12 update that the platform was operating and subscriptions were billing. It also pointed users to data export and account deletion options. Subscribers can review whether to keep paying, while users who want a copy of their data can check the export option.

The company expects the sale process to finish in late November or early December 2026. If no proposal supports continued operations, it says it will wind the platform down.