Character.ai files for bankruptcy, and Disney's $20 million opening bid does not include the app

Character.ai filed for Chapter 11 bankruptcy late Monday to sell itself under court supervision, with a Disney affiliate lined up as the opening bidder at $20 million for a license to some of its technology and legal claims, not for the chatbot app, which will be wound down if no buyer keeps it running.

What Disney is actually buying

Character.ai, the app where people chat with AI-generated characters, filed for Chapter 11 bankruptcy protection late Monday in Delaware and put itself up for sale. The first offer on the table comes from a Disney affiliate, and it is not an offer for the app.

Under an agreement signed before the filing, Disney Worldwide Services would pay $20 million for a non-exclusive, perpetual license to certain Character.ai intellectual property and certain of the company's legal claims. Disney will also provide transition services using former Character.ai employees it has hired. The company said those services will help it keep running the platform safely for a limited period while the sale goes on.

That makes Disney the stalking horse. Its bid sets the opening price in a court-supervised auction, and other bidders can top it with higher or better offers under Section 363 of the Bankruptcy Code. Because the license is non-exclusive, Disney would not hold sole rights to what it is licensing.

The app needs a different buyer to survive

The company, formally Character Technologies Inc., said it expects to keep operating with minimal disruption during the sale. It has asked the court for the usual first-day approvals to keep paying wages and benefits, honor commitments to users and pay vendors and partners for obligations incurred after the filing.

The announcement is blunt about the alternative. If the sale does not produce a purchase that keeps the platform going, Character.ai will be wound down. Disney's bid, as the company describes it, covers a license and claims, not continued operation of the service. The app survives only if another bidder wants it as a working business.

In a post to users on Monday, Character.ai said paid subscriptions remain active and billing is unchanged for now, and that it intends to notify subscribers in advance if paid features change. It said its privacy and security practices are unchanged and that users can still delete their accounts or export their data.

The company expects the sale to be completed, and any resulting deals to close, in late November or early December 2026. The court must first approve the bidding procedures the company proposed on Monday.

What the filing shows

The case, No. 26-11603 in the U.S. Bankruptcy Court for the District of Delaware, lists estimated assets and liabilities between $50 million and $100 million. The official form asks for ranges rather than exact figures. The petition's list of largest unsecured creditors names the commonwealths of Pennsylvania and Kentucky and a minor plaintiff as litigation claimants, each marked contingent, unliquidated and disputed with no amount given, according to a review of the filing by PPC Land.

Chief Executive Colin Adams said the company had spent the past year trying to sustain the business "in the face of significant legal, regulatory, and operational headwinds," and that the board concluded a court-supervised sale offered the best chance to maximize value for all stakeholders. The company did not disclose revenue, user numbers or its cash position.

Character.ai hired Wilson Sonsini Goodrich & Rosati as legal adviser, Areté Partners as restructuring adviser and Houlihan Lokey as investment banker. Disney is advised by Skadden, Arps, Slate, Meagher & Flom.

From Google's deal to Disney's hires

Character.ai was one of the best-known consumer startups of the chatbot boom. Its co-founders, Noam Shazeer and Daniel De Freitas, left Google to start it in 2021. In August 2024 Google hired both of them back, along with a research team of about 30 people, and took a non-exclusive license to the company's models. Investors were paid at a valuation of $2.5 billion, The Verge reported at the time, and roughly 140 employees stayed behind to run the app.

The next leadership move went to Disney. On Sept. 18, Character.ai said its chief executive, Karandeep Anand, was joining Disney in a newly created role as senior executive vice president and chief technology officer, and that he expected members of Character.ai's technical team to join him. Less than a month later, Disney is the opening bidder, and the people who will help keep the app running during the sale are former Character.ai staff now on Disney's payroll.

The two deals are not directly comparable. Google's 2024 payment brought it a license and a research team, while Disney's $20 million buys a non-exclusive license and claims out of bankruptcy, and other bidders can still outbid it.

What comes next

The next step is a court ruling on the proposed bidding procedures, which govern how rival offers are made and judged. The open questions are whether any bidder wants to run the app as a going concern, which intellectual property and claims the Disney license covers, and what Disney plans to do with them. The company has not said.