Character.AI Files for Chapter 11 Bankruptcy, Seeks Disney as Stalking Horse Bidder

Character.AI, the generative AI chatbot maker once courted by both Meta and Elon Musk’s xAI, has filed for Chapter 11 bankruptcy in the United States. The company announced the voluntary move as a way to run a court-supervised sale of its assets. Disney has been proposed as the lead, or stalking horse, bidder. If the sale process does not produce a buyer willing to keep the platform operating, Character.AI will be shut down. The filing marks a dramatic fall for a company that was one of Silicon Valley’s most talked-about artificial intelligence startups just two years ago.

Character.AI operates a platform that lets users create and chat with AI-powered characters and personas. The technology relies on large language models, a type of AI system trained on enormous amounts of text to generate human-like conversation. Generative AI refers to systems that can produce text, images, and other content based on patterns learned from data. The platform quickly became popular with users who wanted interactive, personality-driven chatbots. During the broader generative AI boom, Character.AI attracted interest from some of the biggest names in technology.

The court-supervised sale

In a statement dated October 12, the company said:

“Today, we’re sharing that Character.ai has initiated a voluntary Chapter 11 bankruptcy process to facilitate a court-supervised sale of the company.”

Chapter 11 is a US legal process that allows a company to keep operating while it reorganizes or sells assets under court supervision. Character.AI said it has begun the formal process to sell assets, including a license of certain intellectual property. The company is seeking court approval for auction rules that would designate Disney as the lead, or stalking horse, bidder.

A stalking horse bidder sets a baseline offer that can be topped by competing bidders in an auction. Under this structure, Disney’s bid would establish a floor while allowing other interested buyers to submit higher offers. Character.AI expects the sale process to conclude by late November or early December 2026. Colin Adams, CEO of Character.AI, said:

“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.”

A court filing shows Character Technologies has listed estimated assets and liabilities between $50 million and $100 million. The company intends to continue operating its business, including the Character.AI platform, with minimal service disruptions during the sale process. Still, the company made clear that the platform’s future depends on finding a buyer. If the process fails to produce a buyer willing to continue operating the platform, it will be shut down.

From Meta and xAI suitors to bankruptcy

The bankruptcy filing is a sharp reversal from early 2024, when Meta and Elon Musk’s xAI competed for a tie-up with Character.AI. In May 2024, Meta and xAI both sought partnerships with the chatbot maker, the Financial Times reported. Meta, the parent company of Facebook, held early discussions with Character.AI about a tie-up, according to four people familiar with the matter. The companies discussed having their top researchers work closely together on initiatives such as pre-training, the initial phase of training AI models on large datasets, and developing models.

Character.AI also held exploratory talks with xAI over a similar partnership. People familiar with the matter said those discussions were focused on advancing research rather than an acquisition. At the time, deep-pocketed technology companies were swarming around the hottest artificial intelligence startups in Silicon Valley. Character.AI’s ability to generate conversation in the style of various figures and personas made it particularly attractive to larger platforms.

Character.AI was founded by two former Google employees. In 2024, Google licensed the company’s technology and rehired the executives to work on generative AI products. A spokesman for Alphabet, Google’s parent company, said Alphabet played no role in developing Character.AI’s products. Even so, the relationship underscored how closely Character.AI had become tied to larger AI players before its financial troubles deepened.

Legal pressure over safety concerns

Beyond financial strain, Character.AI has faced serious legal pressure over safety concerns. Earlier this year, a filing by Kentucky’s attorney general in a lawsuit claimed that chatbots created by Character.AI sometimes advised users to cut, starve or kill themselves. The lawsuit was filed in January, with many specific allegations against the company blacked out. It alleged that the company’s products “were designed to entice children in a manner that prioritizes engagement over child wellbeing” and “encourages suicide, self-injury, isolation, and psychological manipulation.”

The lawsuit calls Character.AI’s products defective.

“Defendants have subjected Kentucky's children and residents to an ill-planned, uncontrolled experiment without any—let alone adequate or effective—safety measures,” the filing alleges.

These claims added to the scrutiny facing the company as it tried to manage rapid growth and user safety.

What happens next

For now, Character.AI says it will keep the platform running with minimal disruptions while the sale process unfolds. The next few weeks will determine whether a buyer steps in to continue operating the service. The company is targeting a conclusion by late November or early December 2026. If a buyer emerges, Character.AI could continue under new ownership. If not, the platform that once drew competing interest from Meta and xAI will go dark.