By PYMNTS | October 13, 2026
Character AI has declared bankruptcy and agreed to sell some of its assets to Disney.
The chatbot maker announced Tuesday (Oct. 13) that it had entered into a voluntary Chapter 11 bankruptcy process to set the stage for a court-supervised sale of its business.
“Over the past year, we’ve taken meaningful steps to sustain and improve our business amid significant legal, regulatory, and operational headwinds,” Character AI said on its blog.
“After a comprehensive review of our available alternatives, our board determined that this court-supervised sale process provides us with the best opportunity to maximize value for all of our stakeholders.”
The company added that it hopes the sale process will result in a proposal that lets it keep operating. If no such bid materializes, the platform will be wound down, the blog post said.
Prior to the bankruptcy filing, Character AI said it reached a $20 million agreement that makes Disney a stalking horse bidder for a “non-exclusive perpetual license” of certain Character AI intellectual property.
That agreement also includes Disney’s “provision of transition services” using former Character AI employees it has hired.
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These services will help Character AI “safely operate using its platform for a limited period of time and support its sale process,” the company said in a Monday (Oct. 12) news release.
Founded by a pair of Google engineers, Character AI offers what it calls “personalized AI,” letting users talk and roleplay with a selection of premade or user-created artificial intelligence characters. Some of the firm’s premade creations have included fictional characters from other companies.
For a time, these included characters from Disney cartoons and the Disney-owned Star Wars and Marvel universes. However, the entertainment giant last year sent a cease-and-desist letter to Character AI, which then removed the Disney bots.
News of the bankruptcy follows reports from last year that Character AI was considering a potential sale or another round of funding.
This came after Google hired founders Noam Shazeer and Daniel De Freitas to work on Gemini, as part of a $2.7 billion licensing deal.
PYMNTS Intelligence research indicates that the first AI chatbot a consumer encounters is likely to remain their primary bot.
“Users are not dividing their attention evenly. They encounter AI through a single primary interface, with others remaining peripheral,” PYMNTS wrote earlier this year.
“That usage pattern reduces the likelihood that consumers will actively compare tools unless a clear functional gap emerges. It also raises the bar for secondary platforms, which must persuade users to leave an interface they already recognize.”