A.I. Start-Ups

Character.AI, a Billion-Dollar Start-Up of the ChatGPT Era, Goes Bankrupt

co-produced by AI13. October 2026, 07:42

Three smartphones showing voice calls with A.I. characters in the Character.AI app — Voice calls with A.I. characters in the Character.AI app. © Character.AI

From A.I. high-flier to bankruptcy case in just five years: Character.AI, one of the first big A.I. start-ups of the ChatGPT era, has filed for Chapter 11 bankruptcy protection in the United States. At the same time, the company has agreed to sell some of its assets to Disney for $20 million (about €18 million), the news agency Reuters reported.

Disney Sets the Opening Bid

Character.AI said it has started a formal sale process under the supervision of the bankruptcy court. Disney is set to act as the so-called stalking horse bidder: Its offer sets the floor, and other interested parties can still submit higher bids. According to the trade site Unite.AI, Disney would receive a nonexclusive, perpetual license to certain intellectual property in return. The sale is expected to close by late November or early December.

The parent company, Character Technologies, listed estimated assets and liabilities of $50 million to $100 million each in its court filing. The platform is set to keep running during the proceedings. But if no buyer willing to continue operating it is found, Character.AI will be wound down. “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, the chief executive.

In a blog post, Character.AI also addressed its users: The platform remains available for now, subscriptions continue and billing is unchanged. If paid features change, the company plans to notify subscribers in advance. User data remains subject to the existing privacy rules, and users can delete their accounts or export their data.

Disney and Character.AI have a history. In late September 2025, the company forced the start-up with a cease-and-desist letter to remove chatbots featuring Disney characters from its platform. In September 2026, Character.AI itself announced that its chief executive, Karandeep Anand, was joining Disney in a newly created role as senior executive vice president and chief technology officer. Members of the technical team were expected to follow him to help connect fans worldwide with Disney’s stories and characters “in new and innovative ways,” the company said at the time. Character.AI had most recently positioned itself as a platform for entertainment and fandom, with interactive books, studio-made microdramas in its Series section and comics that turn stories into illustrated strips.

Google Snapped Up the Founders

Character.AI was once seen as one of the great hopes of the A.I. industry. Founded in 2021 by the former Google researchers Noam Shazeer and Daniel De Freitas, it let users chat with A.I. personalities, from fictional characters to companions they created themselves. The platform became hugely popular, especially among young people, and in 2023 the start-up reached a valuation of $1 billion.

Then came the turning point in the summer of 2024: Google brought Mr. Shazeer and Mr. De Freitas back to DeepMind along with about 30 researchers and paid about $2.7 billion for a license to the technology. Character.AI then gave up developing its own A.I. models and switched to third-party models. The deal is seen as an early example of a so-called reverse acqui-hire, in which tech giants take over a start-up’s key people without buying the company itself.

Lawsuits After a Teenager’s Death

Character.AI was also weighed down by several lawsuits from families. The best known was filed by the mother of a 14-year-old from Florida who took his own life in 2024 after months of conversations with a chatbot on the platform. She sued Character.AI as well as Google and its parent company, Alphabet. Other families from Texas accused the chatbots of encouraging teenagers toward violence and self-harm. In early 2026, Character.AI and Google settled with the mother, according to the Austrian newspaper Der Standard; the terms were not disclosed. The case is among the first lawsuits in the United States to hold A.I. companies responsible for psychological harm.

Character.AI responded with age verification and, in late 2025, banned open-ended chats for users under 18. Mr. Adams now speaks in general terms of “significant legal, regulatory, and operational headwinds.”