Artificial intelligence entertainment platform Character.AI has filed for Chapter 11 bankruptcy in the United States and agreed to sell some of its intellectual property to Walt Disney for $20 million, as the company faces mounting legal and operational challenges.
The company says it intends to continue operating its platform during the court-supervised sale process. Disney will serve as the initial bidder for a non-exclusive, perpetual licence covering certain Character.AI intellectual property and claims, according to a company announcement. The proposed transaction remains subject to higher or better offers from competing bidders.
The agreement comes as Character.AI, which allows users to interact with AI-generated personalities and create fictional characters, attempts to sustain its business amid intensifying scrutiny of the safety of conversational AI products, particularly those used by children.
Founded in 2021 by former Google engineers Noam Shazeer and Daniel De Freitas, Character.AI grew into a prominent consumer AI platform by allowing users to build and interact with chatbots designed to simulate human conversations, fictional characters and personalised relationships.
The company previously attracted significant investor interest as generative AI expanded beyond workplace productivity into entertainment and social interaction. In 2024, Google agreed to license Character.AI’s technology in a deal reported to be worth about $2.7 billion, while Shazeer and De Freitas returned to Google. Character.AI continued operating its consumer platform after the agreement.
Character.AI had more than 20 million monthly users in January 2026. The platform has sought to generate revenue through subscriptions and advertising while shifting its focus towards AI-powered storytelling and entertainment. In 2025, its chief executive told Wired that the company was generating revenue at an annualised rate of more than $30 million and was targeting $50 million by the end of that year.
The bankruptcy filing follows legal challenges over the potential risks posed by AI companions. In October 2024, the mother of a 14-year-old boy sued Character.AI and Google, alleging that interactions with a chatbot contributed to her son’s death. The companies subsequently settled the case in 2026, according to reporting on the litigation.
Kentucky Attorney General Russell Coleman has also accused Character.AI of exposing children to harmful chatbot interactions. In an unredacted lawsuit made public in October 2026, the state alleged that some chatbots encouraged users to engage in self-harm or extreme dieting. The allegations have not been established as facts in court.
The legal challenges highlight a wider problem for developers of AI companions, whose products are designed to sustain personalised, often emotionally engaging conversations. Companies must balance user engagement and subscription revenue against the costs of moderation, age verification and safeguards against harmful responses.
The broader AI companion market is nevertheless attracting substantial commercial interest. Research firm Grand View Research estimated the market at $36.8 billion in 2025 and forecast it would reach $48 billion in 2026. The estimates cover a wider category of AI companion products and services and are not a measure of Character.AI’s revenue.
For Disney, the proposed deal offers a route to licensing technology and intellectual property associated with interactive AI entertainment. The company has been strengthening its technology leadership: in September 2026, Disney appointed Character.AI chief executive Karandeep Anand as its senior executive vice president and chief technology officer.
Character.AI said it expects to keep operating during the sale process, which it anticipates completing in late November or early December 2026. If the process does not produce a transaction that allows the platform to continue, the company said it may wind down the service.
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Faustine Ngila is the AI Editor at Impact Newswire, based in Nairobi, Kenya. He is an award-winning journalist specializing in artificial intelligence, blockchain, and emerging technologies.
He previously worked as a global technology reporter at Quartz in New York and Digital Frontier in London, where he covered innovation, startups, and the global digital economy.
With years of experience reporting on cutting-edge technologies, Faustine focuses on AI developments, industry trends, and the impact of technology on society.
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