Disney seeks to buy Character AI assets in Chapter 11 bankruptcy

Fictional characters are a major part of The Walt Disney Company’s business, whether it’s Snow White, Pinocchio, or Peter Pan.

Disney is constantly promoting its characters through various media and artificial intelligence is the newest pathway that it is pursuing.

The company entered the world of artificial intelligence in December 2025 after signing a three-year agreement with OpenAI’s Sora platform to generate short, user-prompted social videos for fans of Disney, Marvel, Pixar, and Star Wars characters, according to an OpenAI statement.

Disney next plans to expand its A.I. exposure through a bankruptcy acquisition of Character.ai‘s intellectual property.

Character.ai files bankruptcy seeking sale

Artificial intelligence entertainment platform Character.AI filed for Chapter 11 bankruptcy protection, seeking a sale of a portion of its intellectual property rights to Disney Worldwide Services Inc. as a stalking-horse bidder for $20 million, with the remainder of assets to be sold in an auction, according to a declaration by Chief Executive Officer Colin. M. Adams.

The lead debtor, Character Technologies Inc., filed its petition on Oct. 12 in the U.S. Bankruptcy Court for the District of Delaware in Wilmington, facing declining liquidity and high costs of operating and defending lawsuits and regulatory investigations related to safety concerns surrounding its products.

Character.ai is a first in kind artificial intelligence entertainment platform that allows tens of millions of users to have immersive, multimodal experiences with fictional or imagined characters. The platform was created in 2021 for one-on-one chats tailored to user preferences and evolved into a leader in entertainment A.I., according to the declaration.

The A.I. platform currently “powers natural conversations, generates stunning visuals that become part of a story, creates dynamic video content with A.I. characters, and is augmented with rich audio experiences to enhance immersion,” the declaration said.

Monthly revenue almost doubled

Character’s revenue has improved in 2026, rising from $2.8 million in December 2025 to $5.3 million for August 2026, but the company reported an operating loss from $8 million to $9 million per month.

The company’s costs of doing business are significant, as it spent $56.1 million on compute costs from Jan. 1 through Aug. 31, 2026, which was about 45% of the company’s operating expenses. Personnel costs were $19.7 million, or about 16% of operating expenses in the eight-month period.

Debtor faces rising legal costs

Character has faced significant legal costs, as well, from lawsuits and investigations from individuals and regulators related to the safety of its products, including lawsuits filed on allegations regarding youth suicide and self-harm.

The debtor has been working with a multistate group and individual states, consisting of 46 states and territories, to resolve various issues. The company was able to settle all then-pending personal injury lawsuits in early 2026 and enacted voluntary changes and safety improvements to its platform, including banning children under 18 years old from open-ended chats with its characters.

The Redwood City, Calif.-based debtor listed $50 million to $100 million in assets and liabilities in its petition.

The company has no funded debt and $57 million in unrestricted cash and cash equivalents and investments as of the petition date.

In mid-2024, the debtor reached an agreement with Google in a strategic transaction to rehire Character.ai’s founders, who had previously worked for Google, grant a non-exclusive license of Character’s technology, and release certain claims against Google in exchange for $2.7 billion, according to the declaration.

Character Technologies’ largest unsecured creditors include Google LLC, owed over $4.1 million; Hogan Lovells US LLP, owed over $2.1 million; DigitalOcean LLC, owed over $1.9 million; Fireworks.AI, owed over $813,000; and Apple Distribution International Ltd., owed over $384,000.

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