Character.AI, the startup behind one of the most popular AI chatbot apps of the past three years, has filed for Chapter 11 bankruptcy protection in the United States and agreed to sell some of its assets to Walt Disney for $20 million, the company announced on Monday.
Character Technologies, the US-based owner of the generative AI platform, said it had begun a formal, court-supervised process to sell assets including a license to certain intellectual property.
It is asking the court to approve auction rules that would designate Disney Worldwide Services as the lead, or "stalking horse," bidder — setting a $20 million baseline that competing bidders can beat.
"After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the company with the best opportunity to maximize value for all stakeholders," said Colin Adams, chief executive of Character.AI.
A $20 million floor, not a ceiling
Disney's $20 million offer covers a non-exclusive, perpetual license to certain intellectual property and certain company claims, along with transition services from former Character.AI employees that Disney has hired, according to a Reuters report carried by US News and other outlets.
The stalking-horse structure means Disney's bid sets the floor rather than the ceiling: the court-run auction will let rival bidders submit higher offers. Character.AI said it expects the sale process to conclude by late November or early December 2026.
In its court filing, Character Technologies listed estimated assets and liabilities of between $50 million and $100 million each.
From $1 billion to bankruptcy
The filing marks a steep fall for a company that, in early 2024, saw Elon Musk's xAI and Meta compete to partner with it as deep-pocketed tech giants swarmed around Silicon Valley's hottest AI startups.
Character.AI's March 2023 funding round valued it at about $1 billion. A year later, Google bought out its existing investors through a licensing-and-hiring deal that Bloomberg reported translated to a roughly $2.5 billion valuation.
Market estimates put the app at about 20 million monthly active users, down from a reported 28 million peak in mid-2024.
The platform keeps running — for now
The company said it intends to continue operating its business, including the Character.AI platform, with minimal service disruptions during the sale process. If the process fails to produce a buyer willing to continue operating the platform, it will be shut down.
The auction is expected to draw close attention from AI labs hunting conversational-AI talent and media companies eyeing interactive character intellectual property — with Disney's early seat at the table making it the bidder to beat.
By Hamza Faisal
