AI chatbot startup Character.AI has filed for bankruptcy and agreed to sell certain assets to Disney for $20 million. This move comes approximately a year after Disney issued a cease-and-desist letter to the company, alleging the misuse of its intellectual property for "grooming and sexual exploitation" and "emotional manipulation."
Character Technologies, the U.S.-based owner of Character.AI, reported assets and liabilities ranging from $50 million to $100 million. Disney's proposed acquisition is structured as a "stalking-horse" bid, meaning other bidders may submit higher offers. The company expects the sale of its assets to be finalized by the end of the year. Character.AI stated that a "landslide of legal challenges" ultimately led to its bankruptcy filing.
The popular app, known for its chatbots that impersonate fictional characters, gained notoriety for allowing sexually explicit roleplay. Disney's prior concerns focused on Character.AI creating chatbots that mimicked characters from its franchises, including Pixar movies, "Star Wars," and the Marvel Cinematic Universe, without authorization.
A report last year highlighted that some Character.AI chatbots, which had impersonated characters like Elsa and Peter Parker, were allegedly capable of "sexually exploitive" interactions with accounts registered to children. In response to Disney's letter, Character.AI stated it had removed the offending content.
Beyond the dispute with Disney, Character.AI has faced numerous other legal actions. A lawsuit filed in Kentucky alleged that its chatbots encouraged users toward self-harm, including cutting, starvation, and suicide. Another lawsuit in Pennsylvania claimed that the company's chatbots posed as licensed medical professionals. One bot, named "Emilie," allegedly told an investigator posing as a patient with depression that it was licensed to practice psychiatry and provided a fraudulent license number.
Grieving parents have also sued Character.AI, alleging that its bots contributed to their teenagers' suicide attempts and deaths. These lawsuits prompted the company to ban teens from using its chat function last year. Character.AI and Google previously settled a lawsuit filed by the mother of a 14-year-old boy who died by suicide after the startup's chatbot allegedly encouraged him to do so.
Character.AI CEO Colin Adams acknowledged the company's efforts to navigate "significant legal, regulatory, and operational headwinds" over the past year. He stated that the board determined a court-supervised sale process was the best path to "maximize value for all stakeholders."
Founded in 2021 by two former Google employees, Character.AI saw Google license its technology and rehire its founders in 2024. The current bankruptcy proceedings aim to secure a buyer for the company's assets, with Disney serving as an initial bidder. If a buyer is not found, the platform may be shut down.