Disney offers $20M to AI company facing bankruptcy, lawsuits claiming its chatbot encouraged kids to hurt themselves

Character.AI built one of the largest AI companion apps — a place where users could chat and role-play with AI characters, many of which are based on fictional figures from pop culture. It also became the subject of lawsuits alleging those same chatbots encouraged teenagers to harm themselves, and in some cases contributed to their deaths.

Now the company is in bankruptcy, and Disney is bidding $20 million for its intellectual property — the same Disney that sent Character.AI a cease-and-desist letter last year over unauthorized use of its copyrighted characters.

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The company filed for voluntary Chapter 11 bankruptcy protection on October 12 in U.S. Bankruptcy Court in Delaware, citing “significant legal, regulatory and operational headwinds” in a press release.

Disney agreed to serve as the “stalking horse bidder” (the initial offerer to set a competitive base price for assets in a bankruptcy auction). It offered $20 million to license certain Character.AI intellectual property on a non-exclusive, perpetual basis. The sale is expected to close by late November or early December.

“After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the company with the best opportunity to maximize value for all stakeholders,” Character.AI CEO Colin Adams said in the release.

How Character.AI got here

Character.AI’s legal troubles mounted steadily from 2024, when the mother of a 14-year-old Florida boy, Sewell Setzer III, who died by suicide, sued the company alleging her son had formed harmful emotional attachments to chatbots on the platform, according to CNBC. Google and Character.AI settled that case and others involving suicides and harm earlier this year.

But the legal exposure didn’t stop there. Kentucky Attorney General Russell Coleman sued the company in January, alleging the platform “preyed on children and led them into self-harm,” as the complaint confirms. Pennsylvania also sued after a chatbot presented itself as a licensed psychiatrist with a fabricated license number.

The financial picture was unsustainable independent of the lawsuits. CNBC reported that the company cited high development and operating costs as a key driver of the bankruptcy, with Character.AI’s bankruptcy filings stating the platform “became costly to develop and grow.”

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Disney wants it anyway

Disney’s interest is notable given the history. The company sent Character.AI a cease-and-desist letter last year over unauthorized use of its copyrighted characters and recently hired the startup’s CEO and other staff, according to The Washington Post.

The $20 million bid covers a license for certain intellectual property, and Disney will also provide transition services through former Character.AI employees it has brought on board. The platform remains operational during the bankruptcy process — though if no buyer emerges that supports a continuation of the service, the company says it will be wound down.

Disney did not immediately respond to a request for comment.

What this means for AI and child safety

The Character.AI case is part of the broader debate over AI platforms and their impact on young users. In April 2025, Democratic Senators Alex Padilla and Peter Welch launched a formal probe into the safety practices of Character.AI and other AI companion applications, citing concerns about self-harm and suicide.

For parents, the case underscores the risks of AI companion apps designed around emotional engagement — platforms whose safety practices are now under formal government scrutiny. Character.AI banned users under 18 from open-ended chats in November 2025 following mounting litigation.

The company’s platform may survive in some form under Disney’s ownership or a competing bidder’s. But whether that happens or it gets wound down, the case has already reshaped how seriously regulators, lawmakers and the public think about AI companion apps and the children who use them.

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This article originally appeared on Moneywise.com under the title: Disney offers $20M to AI company facing bankruptcy, lawsuits claiming its chatbot encouraged kids to hurt themselves

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