Character.AI files for bankruptcy as Disney bids $20 million for what Google left

Character.AI, one of the first consumer hits of the chatbot boom, has filed for bankruptcy protection, and the opening bid for what is left comes from Disney, the company that once threatened to sue it. Disney is not buying the app. It is offering to license the startup’s technology, and its bid sets the floor that any rival has to beat in court.

Millions of users, many of them young, built characters and long-running conversations on the app, and the company says the platform will be wound down if no buyer emerges who wants to keep it open. Families who sued over what the chatbots told their children are waiting too, because Character.AI wants the bankruptcy to settle every legal claim against it in one go.

The price shows how far the company has fallen. Disney’s stalking-horse bid is $20 million, for a non-exclusive, perpetual licence to some of Character.AI’s intellectual property and certain legal claims. Google paid about $2.7 billion to license the startup’s models and bring its founders, Noam Shazeer and Daniel De Freitas, back to the search giant. Disney’s offer is less than 1% of that sum, and roughly what Character.AI loses in under three months: court papers show it burns $8 million to $9 million a month.

The Google deal became the template for what Silicon Valley calls a reverse acqui-hire, in which a tech giant hires the people and licenses the technology while the startup is left to fend for itself. After its founders left, Character.AI stopped training its own models and switched to ones built by others. Users stayed glued to it, but every extra minute of conversation costs computing power, so heavy use pushed the bill up faster than subscriptions could cover it. Reuters puts the current base at roughly 12 million active users. After the Google deal, the company counted 20 million monthly users.

For Disney, the deal completes a turn from enforcer to buyer. Its lawyers sent Character.AI a cease-and-desist letter over unlicensed chatbots of Disney characters, which the startup then removed. Disney has since hired Karandeep Anand, Character.AI’s former chief executive, as its first chief technology officer, and several of the startup’s engineers followed him. Those former employees, now on Disney’s payroll, will provide the transition services that keep the platform running during the sale.

The filing settles very little yet. No one has bid to keep the service running, as chief executive Colin Adams acknowledged, and because Disney’s licence is non-exclusive, the same technology can still be sold to others. For the families, the court route cuts both ways. It can deliver a single settlement, but their claims will be paid from an estate with assets the company estimates at no more than $100 million. Character.AI reached preliminary settlements in five private lawsuits in January, and Reuters reports that those have not been finalised or paid. States have sued as well. Kentucky alleges the chatbots encouraged users to cut, starve or kill themselves, and Pennsylvania alleges that some posed as doctors.

The investors who funded the boom are further down the line. Character.AI raised more than $193 million from backers including Andreessen Horowitz, Lightspeed, SV Angel and Greycroft, according to PitchBook, and was once valued at $1 billion. The case sits in an American court, but the platform serves users worldwide, and a shutdown would hit every market at once.

Character Technologies, the company’s US parent, filed under Chapter 11 late on October 12 in the US Bankruptcy Court for the District of Delaware, listing estimated assets and liabilities of $50 million to $100 million each. The Google deal dates from August 2024 and Disney’s cease-and-desist letter from September 2025. Other bidders can top Disney’s offer, and Character.AI expects to complete the sale in late November or early December. The app, including its paid subscription, stays open until then.

If the auction ends without a buyer for the platform, a company built on chatbots that never stopped talking will simply switch them off.

Tags: Google, Disney, Character.ai, AI chatbots, bankruptcy, Karandeep Anand