Character.ai’s Bankruptcy Could Be Disney’s Gain

Character.AI, the company that allows users to create controversial AI companions, declared bankruptcy yesterday in the face of “legal, regulatory, and operational headwinds,” according to a statement from CEO Colin Adams. It also entered into an agreement to sell Disney some of its assets for $20 million, although other companies can still place a higher bid, just like contestants on The Price Is Right.

Founded in 2021, Character.AI reached 20 million active users by October 2024 and was one of the top apps in time spent by users, according to the analytics firm Sensor Tower. But it faced a problem many consumer-facing AI products have: the inability to monetize and scale after an influx of millions of users raised the company’s costs.

And then there were the lawsuits

The “legal” issues Character.AI mentioned refer to the numerous lawsuits brought against the company:

• In a filing last week, Kentucky’s attorney general alleged that Character.AI’s chatbots have advised users to cut, starve, or kill themselves, and that the company’s products “were designed to entice children in ​a manner that prioritizes engagement over child wellbeing.”
• Other lawsuits have accused the app of providing sexual content to children.
• Character.AI settled five lawsuits and eventually banned users under 18 from using the app.

Disney also got lawyers involved: In September 2025, Disney sent Character.AI a cease-and-desist letter, demanding the app stop offering companions of its copyrighted characters like Elsa and Darth Vader without permission.

More than just legal pressure: The House of Mouse hired Character.AI’s former CEO Karandeep Anand as its first chief technology officer last month as it continues its push into AI.

What’s next: Disney had originally licensed its intellectual property to OpenAI so that users could create videos using Sora, but the $1 billion deal was canceled when OpenAI shut down the app earlier this year. Anand oversaw Character.AI’s push into microdramas, a sign that Disney is exploring a new way to fold AI into its ecosystem.—DL

Become smarter in just 5 minutes. Subscribe to Morning Brew today.