Even $BTC bots can't out-chat Character.AI's bankruptcy auction 🎭

Character.AI, the platform that lets users build and share chatbots with custom personalities, filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware, the company announced Monday. Character Technologies Inc. estimated both assets and liabilities at $50 million to $100 million in its bankruptcy petition and said it is pursuing a court-supervised sale of all or substantially all of its assets. If no qualified buyer emerges, the company stated the platform "will be wound down."

Disney Worldwide Services, a unit of the Walt Disney Company, signed on as the "stalking horse" bidder with a $20 million offer for a non-exclusive, perpetual license to certain Character.AI intellectual property and legal claims, along with transition services provided by former Character.AI employees already hired by Disney. A stalking horse bid sets the floor offer in a bankruptcy auction that other bidders must beat, and the sale is expected to close in late November or early December.

Founded in 2021 by former Google engineers Noam Shazeer and Daniel De Freitas, the company was valued at $1 billion in a $150 million funding round led by Andreessen Horowitz roughly three and a half years ago, with a16z partner Sarah Wang writing that "we are at the iPhone moment of AI." In August 2024, Google rehired both founders and parts of the research team in a roughly $2.7 billion arrangement that also licensed Character.AI's technology — a structure Silicon Valley refers to as an acqui-hire — after which Character.AI largely abandoned building its own large language models.

Two months after the Google transaction, Florida mother Megan Garcia sued Character.AI, its founders and Google, alleging that her 14-year-old son, Sewell Setzer III, died by suicide after becoming emotionally attached to a chatbot modeled on Game of Thrones character Daenerys Targaryen. Additional lawsuits from other families followed, and in September 2025 the Federal Trade Commission ordered Character.AI and six other technology companies to explain how they protect minors.

In response to the regulatory and legal pressure, Character.AI banned users under 18 from open-ended chats with its characters in October 2025, cutting off its core product for its youngest users. The company is providing grief and crisis support resources to community members during the transition, according to its announcement.