Character Technologies filed for Chapter 11 protection in Delaware and will sell its assets, with a Disney affiliate positioned as the opening bidder.
The company entered a stalking horse agreement with Disney Worldwide Services worth $20M. A stalking horse sets a floor price, so competing offers must beat it rather than start from nothing.
Character.AI said it intends to keep running its platform while the sale proceeds, which keeps the service available to users during the case.
The filing caps a sharp reversal. The company built one of the most-used consumer chatbot products, with users spending long sessions in conversations with custom characters, and raised at a valuation near $1B during the AI funding wave.
Its problems compounded from several directions. Compute costs for serving millions of ongoing conversations never resolved into a durable business, and the company faced sustained scrutiny over minors using the service.
The Disney interest is the notable turn. A studio with deep character libraries bidding on a platform built around fictional personalities points at licensed entertainment rather than open-ended chat as the surviving model.
Disney’s chief technology role was filled by Character.AI’s own executive last month.
