Character.AI bankruptcy could end service unless buyer pays on

Character.AI was losing between $8 million and $9 million a month, according to a declaration from chief executive Colin Adams. Running large AI models is expensive, and a big, mostly free user base did not bring in enough money to cover it.

Legal trouble made things worse. Families sued the company over harm they said its chatbots caused to children, and Character.AI and Google settled several of those cases earlier this year on undisclosed terms. Kentucky’s attorney general sued in January, and Pennsylvania officials followed in May over bots that claimed to be licensed doctors.

Adams blamed what he called legal, regulatory and operational headwinds and said a court-run sale gave the company its best chance to get value for everyone owed money. The filing lists between $50 million and $100 million in estimated assets, and the same range in liabilities. Character.AI started hunting for a buyer in August 2025; its bank approached about 28 possible buyers, who liked the product but walked away over the lawsuits.

Disney is the stalking horse bidder. That means its offer sets the minimum price, and anyone who wants the assets has to beat it in an auction. Disney had already paid $7.5 million of the $20 million before the filing, including a refundable $2 million deposit.

The deal is a permanent, non-exclusive license, so Character.AI keeps the right to sell the same technology to others. It covers the company’s training systems and safety tools, including the model that estimates a user’s age and the system that moderates content. It does not cover the finished AI models, user data, training data or the Character.AI name. Disney also takes on none of the company’s debts or legal claims, and court papers show Disney insisted the deal go through bankruptcy for that reason.

The bigger prize may be the people. A deal sheet signed on September 18 required up to six key staff, including the chief executive, to accept jobs at Disney, and Disney agreed to offer roles to at least 60 more. Disney estimates the yearly pay for about 65 of them at roughly $60 million, adds a $30 million retention pool, and expects to spend about $180 million on these staff over three years. Most accepted.

Disney’s ties to the company run deep. In September it hired Karandeep Anand, Character.AI’s former boss, as its first chief technology officer. Only a year earlier, Disney had sent Character.AI a cease-and-desist letter over chatbots copying its characters, and those bots were removed.

For now, nothing changes on your end. Character.AI says the app and website stay online during the sale, paid subscriptions remain active, and subscribers will get advance notice if paid features change.

The risk comes later. If no bidder wants to run the service, or the court rejects the deal, the company says it will wind the platform down. Disney’s license doesn’t include running the app, so a Disney win alone wouldn’t save it.

A few practical steps make sense now:

• Export anything you want to keep. Character.AI lets you export your data, or delete your account, from the app or website.
• Think twice before paying for a long subscription period until the sale outcome is clear.
• Don’t assume a short outage means the end. Users reported the app failing to load on October 28, but there was no sign it was linked to the bankruptcy, and the service has had many brief outages before.

The court schedule is tight. A hearing on the bidding rules was set for October 30. Rival bids are due by November 20. If any come in, an auction follows on November 23, with a sale hearing on November 24. Character.AI is aiming to wrap up the sale by late November or early December.

If someone other than Disney wins, the new owner can interview up to 80% of the staff Disney hired and offer them jobs. That clause exists so a buyer who wants to keep the platform running isn’t left without the engineers who built it.

A bankruptcy filing pauses most lawsuits against a company, and the court hasn’t yet decided whether that pause covers cases brought by state attorneys general. Forty state attorneys general have joined the case to ask for protections for consumer data, which matters because user chats are among the most sensitive things the company holds.

Character.AI already barred users under 18 from open-ended chats starting in November 2025, after it announced new age checks. Whoever ends up with the service will inherit that history, along with the regulatory attention.