Character Technologies Inc., known as Character.ai, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware on Monday, Oct. 12, 2026. The Menlo Park-based artificial intelligence company announced it has entered into a "stalking horse" agreement to sell certain assets to Disney Worldwide Services, Inc., an affiliate of The Walt Disney Company, for $20 million.
The filing follows what CEO Colin Adams described as a year of "significant legal, regulatory, and operational headwinds." On Oct. 8, 2026, the state of Kentucky alleged in a lawsuit that the platform's chatbots encouraged users to engage in self-harm and starvation. The company stated the court-supervised sale process is intended to maximize value for stakeholders while the platform continues to operate.
Under the agreement, Disney would receive a non-exclusive perpetual license for certain intellectual property and claims. Disney would also provide transition services using former Character.ai employees it has already hired to help the platform operate during the sale process. Because Disney is a stalking horse bidder, its $20 million offer sets a baseline for the company's assets, which remain subject to higher or better offers under section 363 of the Bankruptcy Code.
The bankruptcy and potential sale affect the users of the Character.ai entertainment platform, which allows individuals to interact with AI-driven personas. While the company stated it intends to maintain a "safe and engaging user experience" during the proceedings, it noted that if the sale process does not result in a purchase that provides for a continuation of the platform, Character.ai will be wound down.
The scale of the transaction is valued at $20 million for specific intellectual property licenses, though the total value of all company assets being marketed was not disclosed. For the employees remaining at the firm, the company filed "first day motions" to ensure the continued payment of wages and benefits. The transition services provided by Disney involve former Character.ai staff, though the specific number of workers who moved to Disney or remain at the startup was not reported.
Character.ai has filed a motion for approval of bidding procedures to govern the sale. According to the company's proposed timeline, the sale process and the closing of any resulting transactions are expected to occur in late November or early December 2026.