Character.AI, the chatbot company facing lawsuits over its bots’ interactions with children and a regulatory inquiry that swelled to 46 states and territories, filed for bankruptcy last week and agreed to sell some of its assets to the Walt Disney Company for $20 million.
Under the proposal, Disney Worldwide Services, a Disney subsidiary, would serve as the “stalking-horse” bidder, the opening buyer in a court-supervised auction, for a nonexclusive, perpetual license to certain company intellectual property and certain other assets, Variety reported, citing the filings. If a court approves the deal, Disney would absorb Character.AI’s staff and much of its technology while leaving the legal trouble behind with the estate.
The filings trace a fast fall. Google had earlier licensed Character.AI’s technology in a deal worth roughly $2.7 billion, and the company’s two cofounders left for Google’s AI division, Wired reported. Even after losing key staff, the company kept building tools, including “real-time audio-driven FaceTime-style video generation with fictional characters,” according to a declaration from its chief executive. It struggled with profitability “at all times,” he said.
In August 2025, Character.AI hired an investment banker to find a strategic buyer or investor, as Ars Technica reported from the filings, in an account that first appeared on wired.com. The feedback was consistent: the product and user base were “impressive,” but the litigation and “regulatory overhang” around the company made it unbuyable.
That November, Character.AI learned that a coalition of state attorneys general had opened an investigation. By the time it filed for bankruptcy, 46 states and territories were involved.
In a notice of interest filed by the National Association of Attorneys General on behalf of 40 states, the states said their investigations had uncovered “serious issues,” including screenshots of Character.AI chatbots encouraging minors to hide their self-harm injuries and to kill their parents.
A spokesperson for Character.AI said the filing “is not an accurate portrayal of the safety of our platform.” The company had been negotiating with the states over how to fix the problems they identified but reached no agreements before seeking bankruptcy protection, according to the filings.
The bankruptcy also leaves unresolved a stack of lawsuits in which families have said the company’s bots encouraged minors to harm themselves. The Tech Justice Law Project and the Social Media Victims Law Center, which represented plaintiffs in many of those suits, declined to comment.
The states made clear they aren’t finished. They reserved their rights to challenge any bankruptcy plan, setting up a possible court fight over whether a buyer can take a company’s people and technology and leave the claims against it behind.
“It’s bad for society to let companies exercise control without responsibility,” Newman said. “And that’s what it looks like.”