declared bankruptcy in October 2026 after facing multiple lawsuits and regulatory investigations over chatbot safety.
Disney hired the majority of the engineering staff and secured a perpetual license for its frameworks and moderation stack through the bankruptcy proceedings.
The path to bankruptcy and Disney's involvement
In recent years, Character.AI has faced private lawsuits and regulatory investigations around the world over the security of its conversations. Notable among these are an investigation launched by 46 US states and territories, as well as a formal intervention by the Attorneys General Association on behalf of 40 states, which highlighted serious issues surrounding minors’ conversations with digital programs.
According to court documents, Disney requested that the deal be completed in full through bankruptcy proceedings due to the company's reduced cash flow and legal risks.
The terms of the agreement
The process included an initial transaction in September, in which Disney paid $5,5 million and a refundable $2 million down payment. In addition, it plans to secure a worldwide, non-exclusive, perpetual license to the company's code, tools and content control systems.
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If Disney is selected as the winning party in the process, it agreed to pay an additional $12,5 million upon completion of the deal.
This move comes after a previous agreement that Character.AI made with Google in August 2024, which included a $2,7 billion license and the hiring of founders and researchers.
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