Roughly a year after Google and then Disney absorbed its leadership and technology, Character.AI has filed for Chapter 11 bankruptcy protection, leaving a Delaware court to oversee the sale of what remains of the company.

Character Technologies Inc., which does business as Character.AI, initiated the proceedings in the US Bankruptcy Court for the District of Delaware on Monday, October 12. Chapter 11 allows a company to reorganize or sell its assets while continuing to operate under court supervision. The claims agent, Stretto, has posted the case record, numbered 26-11603, at cases.stretto.com/chartech.

Disney's $20 million bid covers a license, not the app

The filing comes with a buyer already lined up: Disney Worldwide Services, an affiliate of the Walt Disney Company, is serving as the opening, or "stalking horse," bidder. Under section 363 of the bankruptcy code, a stalking horse bid sets a floor price that competing buyers can exceed at auction.

Notably, Disney is not bidding to acquire the chatbot app itself. Its $20 million proposal covers a non-exclusive perpetual license to portions of Character.AI's intellectual property, along with certain legal claims. Disney would also take on the obligation to provide transition services using former Character.AI employees it has already hired.

In a statement, Character.AI wrote that "the platform will be wound down" if the sale does not include an arrangement for continuing the Character.AI platform.

The company named Wilson Sonsini Goodrich & Rosati as legal counsel, with Areté Partners advising on the restructuring and Houlihan Lokey acting as investment banker. Disney retained Skadden, Arps, Slate, Meagher & Flom.

Google struck the first deal

Character.AI has been through a "reverse acquihire" before — a process in which a Big Tech company absorbs a smaller firm's founders and researchers alongside a licensing deal, while the original startup gains very little from the arrangement.

Google ran that playbook at Character.AI in August 2024. The deal, valued at $2.7 billion by Fortune, saw the search giant rehire founders Noam Shazeer and Daniel De Freitas and take a non-exclusive license to the startup's technology. Shazeer and De Freitas subsequently took a co-lead role at Google's Gemini and a research scientist position at DeepMind, respectively. Google pursued a similar structure with coding startup Windsurf, in a $2.4 billion licensing deal. For a sense of scale: the $20 million opening bid before the Delaware court is a fraction of the $2.7 billion value Fortune placed on the 2024 arrangement.

Disney's involvement deepened on September 18, when the company named Character.AI chief executive Karandeep Anand as its first chief technology officer. Disney's announcement, which said the move took effect on October 2, confirmed that a number of Character.AI's technical staff would follow Anand. That recruiting wave is baked into Disney's bid, whose transition-services obligation runs through the same employees it has already hired.

Legal baggage trails both buyers

Both companies that have absorbed Character.AI executives and licenses have previously clashed with the firm. Disney sent Character.AI a cease-and-desist letter in September 2025 over unauthorized use of its characters. In January 2026, Google and Character.AI agreed to settle lawsuits brought by families of children who died by suicide or suffered harm allegedly tied to its chatbots. The settlement carried no admission of liability.

Character.AI says it will keep the app running during the sale process. It filed routine first-day motions seeking court approval to pay wages, honor user commitments, and cover vendor obligations incurred after the filing.

Chief executive Colin Adams said in the company's statement that the board, after "a comprehensive review of the available alternatives," concluded that a court-supervised sale offered "the best opportunity to maximize value for all stakeholders."

The company expects the sale to close in late November or early December 2026, leaving a window for competing bidders to top Disney's $20 million floor at auction. Unless a bidder emerges that wants to operate the app rather than license the technology, Character.AI's chatbot platform will go dark.

Source: Cryptopolitan