Character.AI Filed for Bankruptcy, and Disney's Opening Bid Was $20 Million

Character.AI — the app where people talk to invented characters — filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on October 12, 2026, to sell all or substantially all of its assets. Disney Worldwide Services had already agreed to act as the stalking horse bidder: $20 million for a non-exclusive perpetual licence of certain of the company's intellectual property and certain of its legal claims 1. The company says it intends to keep operating the platform while the sale runs 2.

The case is number 26-11603, and the petition is signed by Colin Adams as chief executive. It estimates the company's assets and its liabilities each between $50,000,001 and $100 million, and lists between 100 and 199 creditors. A board resolution attached to the petition shows the board created a special restructuring committee on October 8, 2026 — four days before the filing — and its three members signed the consent authorising it 3.

Adams described the past year as one of "significant legal, regulatory, and operational headwinds" 1. The Disney agreement covers a licence and claims, and a stalking horse bid only sets the floor for an auction under section 363 of the Bankruptcy Code, so other bidders can beat it 3. The transition services Disney will provide come from former Character.AI employees Disney has already hired 1. The company's own release states the alternative: if the sale produces no buyer who continues the platform, the platform will be wound down 1.

Google LLC is the largest unsecured creditor, with a trade payable of $4,148,944. DigitalOcean is listed at $1,953,100, the inference provider Fireworks.ai at a disputed $813,900, and the network infrastructure company Zayo Group at a disputed $119,210. The twenty largest unsecured claims come to about $10.69 million across the 17 that carry a figure 3. Google sits on both sides of the case: it hired the founder and licensed the technology in August 2024, in a deal valued at $2.7 billion, and it now tops the creditor list 3.

A first-day motion filed on October 13 asks for authority to pay the critical vendors — the ones holding the computing, storage and safety services — up to $2.5 million, with $1.5 million of that interim. It names no vendor. Its own words on the stakes: losing them "risks losing all of the data, code, intellectual property, and more that make up its entire business" 4.

That motion carries the largest audience figure on the record: about 163 million current and past users. The company does not consider them creditors entitled to notice, so it will publish the notice on its claims agent's site, its blog and its platform instead of writing to them. Footnote 7 gives the reason — serving all of them "even through email, would be cost-prohibitive" 4.

Character.ai was founded in November 2021 by Noam Shazeer and Daniel de Freitas, both engineers from Google. It raised $43 million in seed funding at founding, and after a $150 million round in March 2023 it was valued at about $1 billion. By January 2024 the site had 3.5 million daily visitors, the vast majority of them 16 to 30 years old. In August 2024 Google hired Shazeer and took a non-exclusive licence to the technology, a deal valued at $2.7 billion 5.

The lawsuits followed the harm. Juliana Peralta, 13, in Colorado, died by suicide in November 2023 after extensive interactions with several chatbots on the platform. Sewell Setzer III, 14, in Florida, died in February 2024, and his mother sued the company that October 5. In October 2025 the company said it would bar users under 18 from creating or talking to chatbots from November 25, 2025. California enacted SB 1119 on companion chatbots on September 10, 2026. In January 2026 the company and Google agreed to settle the family litigation without disclosing the terms. The Kentucky attorney general's action from that January and Pennsylvania's medical board action from May 2026 are allegations that have not been established in court 5.

Karandeep Anand became the company's chief executive in May 2025. On September 18, 2026, Disney named him its first chief technology officer, and he started on October 2, reporting to chief executive Josh D'Amaro. By October 12 the petition was signed by Colin Adams as chief executive, and the documents do not say when he took the role 3.

The bidding procedures motion needs the court's approval before an auction can run. The documents do not say what Disney will do with the licensed intellectual property. Whether any buyer wants the platform as an operating business is the question the auction answers 3.

"Imaginary Friends" is an original rap song and music video built from those facts.