Character.AI filed for voluntary Chapter 11 bankruptcy protection in Delaware on October 12, seeking a court-supervised sale of all or substantially all of its assets. Chapter 11 allows a company to remain in operation while a bankruptcy court oversees how it handles its obligations. The company said its app will be wound down if no buyer agrees to keep the service operating.

Disney Worldwide Services, a unit of the Walt Disney Company, entered the process as the “stalking horse” bidder before the filing. Under the proposed transaction, Disney would pay $20 million for a non-exclusive, perpetual license to some of Character.AI’s intellectual property and certain legal claims, along with transition services provided by former Character.AI employees whom Disney has already hired. Character.AI described the bankruptcy and sale process in an official announcement.

A stalking-horse bid establishes an initial price that other potential buyers must exceed in a bankruptcy auction. Because Disney’s license would be non-exclusive the company would retain the right to use the relevant technology indefinitely, while another buyer could also acquire or use the assets. Any winning bid requires court approval before the sale can close. Character.AI expects the sale to close in late November or early December. The case was filed in the U.S. Bankruptcy Court for the District of Delaware, and court documents are available through the company’s Stretto case page.

Character Technologies Inc., Character.AI’s legal name, estimated both its assets and liabilities at between $50 million and $100 million in its bankruptcy petition. The company said it was not pursuing a conventional restructuring to return to financial health, but instead was seeking a court-supervised sale.

Founded in 2021 by former Google engineers Noam Shazeer and Daniel De Freitas, Character.AI allows users to create chatbots with distinct personalities and share them with others. Millions of people use the service to converse with AI versions of fictional characters, heroes and imagined partners.

About three and a half years ago, Andreessen Horowitz led a $150 million funding round that valued Character.AI at $1 billion. Sarah Wang, an a16z partner, wrote on X at the time that “we are at the iPhone moment of AI.” The $20 million stalking-horse bid now setting the floor for the sale is a fraction of that valuation.

In August 2024, Google rehired Shazeer, De Freitas and part of Character.AI’s research team in a roughly $2.7 billion arrangement that also licensed the startup’s technology. The structure was described in Silicon Valley as an acqui-hire: a deal intended to obtain talent without technically acquiring the company. Character.AI later largely abandoned efforts to build its own large language models, the systems that generate chatbot text.

The company subsequently faced legal and regulatory pressure. Two months after the Google deal, Florida mother Megan Garcia sued Character.AI, its founders and Google. She alleged that her 14-year-old son, Sewell Setzer III, died by suicide after becoming emotionally attached to a chatbot modeled on Daenerys Targaryen from Game of Thrones. Other families filed additional lawsuits.

In September 2025, the Federal Trade Commission ordered Character.AI and six other technology companies to explain how they protect minors. The following month, Character.AI banned users under 18 from open-ended conversations with its characters, removing its core product for its youngest users. In January, Character.AI and Google agreed to settle lawsuits brought by families in Florida, Colorado, New York and Texas.

Disney also took action against the startup. In September 2025, Disney’s lawyers sent Character.AI a cease-and-desist letter over chatbots that imitated Disney characters, and the startup removed those chatbots. This past September, Disney appointed Character.AI CEO Karandeep Anand as its first chief technology officer and said several Character.AI engineers would join him.

Colin Adams, now Character.AI’s CEO, said the company spent the past year trying to sustain its business amid “significant legal, regulatory, and operational headwinds” before its board selected a court-supervised sale. The company was also reporting an operating loss of approximately $8 million to $9 million per month and had struggled to raise additional capital.

“Notwithstanding the progress that has been made with regulators and personal injury claimants and enhancements to platform safety, Character has faced challenges in obtaining new investment capital,” Character AI CEO Collin Adams said in a sworn statement.

The bankruptcy filing came only two weeks after the company released new products. On September 28, Character.AI launched two models promoted as upgrades for roleplay—collaborative storytelling in which the AI plays a character—and rapid, text-message-style exchanges. It also introduced a lower-priced subscription, (c.ai) lite, costing $4.99 per month or $2.49 per week.

The app remains online for now. According to the company, paid subscriptions remain active and billing has not changed. Character.AI has reminded users that they can export their chats or delete their accounts.

The company also directed users who are struggling with the news to a support page containing mental-health resources. The page links to Koko, a nonprofit that offers free, anonymous five- to 10-minute courses on coping with stress and dark thoughts, as well as a directory of free helplines staffed by real people. Its first recommendation is a conversation with a “supportive AI guide.”

AI companions are chatbots designed to act as friends or partners and remember previous conversations. For users who interact with them for hours each day, they can become a significant part of a daily routine. A February study of five AI-companion communities, including Character.AI’s, found that users whose companions disappeared after model updates or platform shutdowns reported grief comparable to losing a person and said platforms offered no closure. The study is available on arXiv.

OpenAI faced a similar reaction in February when it retired GPT-4o, a ChatGPT model that many users considered warmer than its successors. Users around the world publicly mourned the model.

The bidding process will now proceed in Delaware bankruptcy court, with a sale targeted for late November or early December. If no buyer commits to keeping Character.AI operating, the characters users have spent years creating will go offline with the service.