By Dietrich Knauth
Oct 13 (Reuters) - Chatbot platform Character.AI filed for bankruptcy late on Monday, saying it has agreed to sell some assets for $20 million to Walt Disney.
Character.AI said it hopes to use its bankruptcy to reach a global resolution of all legal claims against the company, in court papers filed on Tuesday in Wilmington, Delaware bankruptcy court. Those legal claims include investigations launched by US states and international regulators, as well as private lawsuits alleging
that Character.AI chatbots pushed children to suicide and self-harm.
US states have sued the company multiple times, with Kentucky alleging that its chatbots encouraged users to cut, starve or kill themselves and Pennsylvania alleging its chatbots posed as doctors.
Character.AI reached preliminary settlements in five private lawsuits in January. The terms of those settlements were not disclosed, and recent court documents from those five cases indicate that the settlements have not yet been finalized or paid.
Character.AI has previously said that it had worked to prioritize user safety, and declined to comment on Tuesday on how the bankruptcy could impact the legal claims against it.
The bankruptcy caps a sharp fall for Character.AI, a high-profile AI startup whose technology has attracted interest from Alphabet's Google, Meta and Elon Musk's xAI. The company has been burning through over $8 million a month, and could shut down in bankruptcy if no buyer emerges to carry on its operations.
DISNEY'S INTELLECTUAL PROPERTY BID
Disney, which hired Character.AI's ex-CEO, Karandeep Anand, as its chief technology officer earlier this month, will be a "stalking-horse" bidder — an initial prospective buyer — for a nonexclusive perpetual license to Character.AI's intellectual property. Other bidders can top Disney's offer, according to court filings.
Character.AI expects to close the sale of all its assets by late November or early December. Character Technologies, its US-based owner, listed estimated assets and liabilities of between $50 million and $100 million, according to a court filing.
The platform will continue to operate during the bankruptcy, but may be shut down if it can't find a buyer, the company said.
UNPROFITABLE DESPITE 12 MILLION USERS
Character.AI has not been profitable, despite having roughly 12 million active users. Due to the high costs of computing power and employing AI talent, the company operates at a loss of approximately $8 million to $9 million per month, according to court documents filed on Tuesday.
Disney declined to comment on the proposed bankruptcy sale on Tuesday. It previously said that it was hiring several of Character.AI's technical staff, and that Anand would lead Disney's efforts to modernize the way it builds and delivers technology companywide.
Two former Google employees founded Character.AI in 2021. In 2024, Google licensed Character.AI's technology and rehired the founders.
The Financial Times reported in May 2024 that Meta and xAI were competing to partner with Character.AI. In July 2024, Musk denied a media report that xAI was considering buying the company.
In September 2025, Disney sent Character.AI a cease-and-desist letter, demanding it stop using Disney's copyrighted characters without permission. Character.AI said it had removed them.
(Reporting by Dietrich Knauth in New York and Anzar Mehraj and Rhea Rose Abraham in Bengaluru; Editing by Alexia Garamfalvi, Joyjeet Das and Matthew Lewis)
