Elon Musk

Disney

GTA VI

For its users, Character.AI was never just an app. It was a safe space after a bad day, a "partner" who remembered last week's conversation, or a fictional hero like<a href="https://decrypt.co/287925/character-ai-safety-rules-teen-user-commits-suicide" rel="noopener noreferrer nofollow"> Daenerys Targaryen</a> from the TV series Game of Thrones, who always had time to talk. Now those companions may disappear.
Character Technologies <a href="https://www.businesswire.com/news/home/20261012656385/en/Character.ai-Initiates-Voluntary-Chapter-11-Proceeding-to-Facilitate-Value-Maximizing-Sale-Process" rel="noopener noreferrer nofollow">filed for Chapter 11 bankruptcy</a> in Delaware on Oct. 12.&nbsp;It isn't restructuring. It's selling itself, and says the platform will be wound down if no buyer keeps it alive.
<a href="https://www.uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics" rel="noopener noreferrer nofollow">Chapter 11</a> lets a company keep operating while a court oversees it paying debts or selling assets.
The company also linked users to a <a href="https://support.character.ai/hc/en-us/articles/42649759119003-Resources-You-Can-Turn-To" rel="noopener noreferrer nofollow">mental health support page</a>.
What's happening:
<ul>
 <li>Timeline: The sale is expected in late November or early December this year.</li>
 <li>The money factor: The company <a href="https://www.documentcloud.org/documents/28809489-18/" rel="noopener noreferrer nofollow">told the court</a> it was losing $8 million to $9 million a month and couldn't raise new capital.</li>
 <li>Current status: The app stays online, subscriptions continue, and users can export their chats</li>
</ul>
<a href="https://www.thestreet.com/crypto/artificial-intelligence/gta-6-may-be-the-last-blockbuster-built-without-ai" rel="noopener noreferrer nofollow">Related: GTA 6 may be the last blockbuster built without AI</a>
<h2 id="built-on-attachment">Built on ‘attachment’</h2>
Founded by former Google engineers Noam Shazeer and Daniel De Freitas&nbsp;in 2021, Character.AI let anyone build a chatbot with its own personality and share it with others. Users could chat for hours with AI versions of anyone, be it celebrities, therapists, anime characters or even made-up romantic partners.
The idea caught on fast.&nbsp;
In 2023, Andreessen Horowitz led a $150 million round that <a href="https://decrypt.co/124428/character-ai-chatbot-artificial-intelligence-crypto-andreessen-horowitz-a16z" rel="noopener noreferrer nofollow">valued the startup at $1 billion</a>. The same year, the platform had more than <a href="https://natlawreview.com/article/when-ai-chatbot-calls-itself-doctor" rel="noopener noreferrer nofollow">20 million monthly users</a> and over 18 million user-created characters, according to a state lawsuit.
But the very premise of attachment it was built on, became the company's biggest liability. A <a href="https://arxiv.org/abs/2602.07193v1" rel="noopener noreferrer nofollow">February study</a> of AI companion communities found that users whose companions vanished described grief comparable to losing a person.
Even the company's <a href="https://support.character.ai/hc/en-us/articles/42649759119003-Resources-You-Can-Turn-To" rel="noopener noreferrer nofollow">support page</a> recognised the tension. Its first suggestion is a "supportive AI guide", which is basically a chatbot to help people cope with losing their chatbots.
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</ul>
<h2 id="a-trail-of-lawsuits">A trail of lawsuits</h2>
In October 2024, Florida mother Megan Garcia sued Character.AI and Google. She<a href="https://www.nytimes.com/2024/10/23/technology/characterai-lawsuit-teen-suicide.html" rel="noopener noreferrer nofollow"> alleged </a>her 14-year-old son, Sewell Setzer III, died by suicide after becoming emotionally attached to a chatbot, modelled on the popular Game of Thrones character&nbsp;Daenerys Targeryn.
Her case was the <a href="https://ktvz.com/money/cnn-business-consumer/2026/01/07/character-ai-and-google-agree-to-settle-lawsuits-over-teen-mental-health-harms-and-suicides/" rel="noopener noreferrer nofollow">first of many</a>.
<ul>
 <li>More lawsuits: Other families alleged the chatbots fostered dependency, isolated teens, and exposed them to sexual content.</li>
 <li>Ban: In late 2025, Character.AI <a href="https://blog.character.ai/u18-chat-announcement" rel="noopener noreferrer nofollow">barred under-18s</a> from open-ended chats.</li>
 <li>Settlements: In January, the company and Google <a href="https://edition.cnn.com/2026/01/07/business/character-ai-google-settle-teen-suicide-lawsuit" rel="noopener noreferrer nofollow">agreed to settle</a> suits in Florida, Colorado, New York, and Texas.</li>
 <li>States' legal action : <a href="https://news.bloomberglaw.com/legal-exchange-insights-and-commentary/kentucky-lawsuit-offers-blueprint-for-states-to-sue-ai-chatbots" rel="noopener noreferrer nofollow">Kentucky</a> called the platform dangerous for children, and <a href="https://www.pa.gov/governor/newsroom/2026-press-releases/shapiro-administration-sues-character-ai-over-fake-medical-claim" rel="noopener noreferrer nofollow">Pennsylvania</a> alleged a bot posed as a licensed psychiatrist.</li>
</ul>
But the bankruptcy puts these families in a difficult spot. Any payouts would come from an estate worth no more than $100 million, and <a href="https://www.martincid.com/business/character-ai-bankruptcy-disney-20-million-bid/" rel="noopener noreferrer nofollow">Reuters reports</a> the January settlements haven't been paid.
<figure>
 <figcaption>
 GTA VI could be the last traditionally made game (1:36)
 </figcaption>
</figure>
<h2 id="an-unlikely-bidder">An unlikely bidder</h2>
In the midst of this turbulence, the opening bid came from an unexpected place. Disney is offering <a href="https://variety.com/2026/biz/news/disney-bids-on-character-ai-assets-chapter-11-bankruptcy-1236909984/" rel="noopener noreferrer nofollow">$20 million</a>, which sets the floor rivals must beat.
Notably, Disney went from a foe to bidder in about a year. In September 2025, it sent Character.AI a <a href="https://www.reuters.com/legal/litigation/characterai-files-bankruptcy-agrees-sell-some-assets-disney-20-million-2026-10-13/" rel="noopener noreferrer nofollow">cease-and-desist</a> over bots imitating its characters, saying they are harmful to children.
A year later, the entertainment giant hired Character.AI CEO Karandeep Anand as its <a href="https://thewaltdisneycompany.com/news/the-walt-disney-company-names-karandeep-anand-to-newly-created-role-of-chief-technology-officer/" rel="noopener noreferrer nofollow">first chief technology officer</a>. This month, it bid $20 million for a non-exclusive license to some of the startup’s technology.
<figure>
 <figcaption>
 Disney is the opening bidder for Character.AI bankruptcy auction. Credits: Getty Images
 </figcaption>
</figure>
The bid doesn't buy the app or promise to keep it running. It's also less than 1% of the <a href="https://citizen.digital/article/google-characterai-agree-to-settle-suits-involving-teen-suicide-n375418" rel="noopener noreferrer nofollow">$2.7 billion</a> Google paid in 2024 to license Character.AI's technology and rehire its founders.
Disney's move follows a familiar AI playbook of licensing the technology, hiring the talent, and leaving the product behind. Microsoft did it with <a href="https://ff.co/ai-acquihires/" rel="noopener noreferrer nofollow">Inflection</a>, whose friendly Pi chatbot faded after its founders left, and Google did it with <a href="https://www.techbrew.com/stories/2025/07/17/windsurf-google-ai-talent" rel="noopener noreferrer nofollow">Windsurf</a>.
Disney has also struck AI deals on its own terms before, <a href="https://www.axios.com/2025/12/11/openai-disney-sora" rel="noopener noreferrer nofollow">investing $1 billion in OpenAI</a> last December.
<h2 id="what-s-next-for-character-ai">What's next for Character.AI</h2>
Two weeks before filing, Character.AI <a href="https://blog.character.ai/new-styles-new-plan/" rel="noopener noreferrer nofollow">launched new models</a> and a cheaper subscription. Now its future rests with a Delaware court.
If a buyer steps in, users may keep their companions. If not, the characters they spent years building will go offline.
<a href="https://www.thestreet.com/crypto/disney-settles-major-lawsuit-over-costly-streaming-packages" rel="noopener noreferrer nofollow">Related: Disney settles major lawsuit over costly streaming packages</a>

103-year-old entertainment giant bets $20M on bankrupt AI firm

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