Character.ai files for bankruptcy, agrees to sell assets to Disney

AI platform Character.ai has filed for Chapter 11 bankruptcy protection, citing mounting legal challenges and high operating costs. The four-year-old startup announced the move surprisingly on Monday.

The Menlo Park, California-based company has faced numerous lawsuits in recent years, with some alleging its AI companions encouraged users to harm themselves. The bankruptcy filing follows these significant legal hurdles.

Character.ai has agreed to sell intellectual property to Disney Worldwide Services, an affiliate of The Walt Disney Company, for $20 million. The deal also includes "transition services" intended to help sustain Character.ai's operations temporarily. Disney will act as a "stalking horse" bidder in the court-supervised sale process, meaning other companies could submit competing offers.

"Over the past year, Character.ai has taken meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds," said CEO Colin Adams in a statement. He added that the board determined the court-supervised sale process offers the best opportunity to maximize value for all stakeholders.

The company stated its platform "remains up and running" as it seeks a path forward. The sale process is expected to conclude by late November or early December.