Andy Garcia · freelance dev
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AI & Bankruptcy

Character.AI Filed for Chapter 11 With 12 Million Monthly Users. Disney's $20 Million Bid Is for the Code, Not the Users.

October 19, 2026 7 min read

On October 12, Character Technologies, the company behind Character.AI, filed for Chapter 11 in Delaware. The headline number came from its press release: Disney offered $20 million, as stalking horse bidder, for "a non-exclusive perpetual license" to some of its intellectual property. On October 18, TechCrunch added the second number, from a filing Bloomberg had reported on: Disney agreed to offer jobs to at least 60 Character.AI employees, the majority of the workforce, with estimated annual compensation of $60 million.

Character.AI has about 12 million monthly active users, according to its CEO's sworn declaration (the attorneys general's October 14 filing says "over 20 million"). The only firm offer on the table is $20 million in cash, for a license. In 2024, Google paid about $2.7 billion for the same shape of deal: a non-exclusive license, the founders rehired, claims released. That is 135 times Disney's cash offer.

I am CTO of a LegalTech built on Claude, so I read AI vendor failures with one question: when the company goes, what leaves with the buyer, and what stays behind? The court file answers it in writing.

What Disney licenses, and what it leaves

The Disney agreement is attached to the bidding procedures motion filed on October 13. Its Schedule A lists 25 named areas of "code repositories, documentations, frameworks, tools" plus a catch-all: the post-training stack, training recipes, the reward model, the inference stack with GPU cluster management, the chat stack. Roughly a third of the list is safety tooling: an age prediction model, a system called Guardian for long-horizon safety monitoring, classifiers, red-teaming frameworks, the trust and safety moderation stack. Nine patents and applications come with it, four of them issued, including one on optimizing the key-value cache for LLM inference.

Section 3.2 of the agreement lists what Disney does not get: third-party technology, the brand and domain names, "any consumer-facing applications," end user data and personal information, "any input entered by Licensor end users" and the outputs generated for them, training data, and "any Finished Models, including each user-selectable conversational model or chat style." Disney assumes no liabilities. In the words of the motion: "All liabilities of the Debtor shall be Retained Liabilities following the Sale."

So the deal takes the know-how and the people, and leaves the users, the chats, the models and the lawsuits with the estate. The license is non-exclusive, so Character can still license the same code to someone else. Anything Disney builds with it, "including any models, weights and synthetic data," belongs to Disney.

Why it had to go through a bankruptcy court

The investment banker's declaration explains the route. In August 2025, the company hired a first bank, which approached about 28 potential buyers and investors. The feedback was consistent: the product and user base were "impressive," but "the litigation and regulatory overhang on Character was too great." One proposal came back, and it was not actionable.

The CEO's declaration lists that overhang: an investigation by a multistate group that grew to 46 states and territories, lawsuits filed by Kentucky and Pennsylvania, open investigations in Florida, New Mexico and Texas, and a GDPR fine from Italy's data protection authority. The personal injury suits were settled in January 2026. One new suit, filed in August, is pending.

Then the condition that decided the route. "Disney required that the transaction be subject to a chapter 11 process," and the agreements provide that it be implemented "free and clear of all claims (including successor liability)." A final, non-appealable court order to that effect is a condition of Disney's closing. The deal that did come together needed a judge to separate the parts from the liabilities.

Disney had already moved. Character signed the first stage of the deal on September 18. Disney hired the majority of the workforce, including the CEO, before the petition, and paid $7.5 million of the $20 million up front, $2 million of it a refundable deposit. TechCrunch reports that the former CEO, Karandeep Anand, became Disney's first CTO. In the term sheet, Disney estimates the annual pay of about 65 offered employees at $60 million, adds a $30 million retention pool, and puts pay and retention over three years at about $180 million: nine times the cash offered for the license.

The cost line

For anyone building on models, the first-day declaration is the most useful document in the file. From January 1 to August 31, 2026, Character spent about $56.1 million on compute, mostly contracted GPU capacity from cloud providers. That was about 45 percent of operating expenses. Personnel came second, at $19.7 million, or 16 percent.

That is about $7 million of compute a month. Monthly revenue nearly doubled, from $2.8 million in December 2025 to $5.3 million in August 2026, mostly from subscriptions and in-app ads. Average monthly compute alone was still above August's revenue. In 2025, compute averaged about $10 million a month against $23.6 million of revenue for the whole year: roughly five to one.

The company did what the playbook says. It moved inference to "lower-cost GPU capacity," switched to "post-training open-weight models rather than developing proprietary foundation models," and cut monthly operating expenses, legal fees excluded, from $21.9 million in the second half of 2024 to $13.3 million in August 2026. It was still running an operating loss of $8 to $9 million a month.

One more line from the declaration: active users spend about 120 minutes a day on the platform. I ship consumer iOS apps, where that is the user you dream of. In an inference business, it is also the most expensive user you have.

If you buy AI software

Character.AI is still online, and the company says the platform will be wound down if no bid comes in to keep it running. Look at who runs it now. On September 30, Character had about 86 full-time employees, and 66 had accepted jobs at Disney. On the petition date it still employed 18 full time, and expected to keep 8 of them through key portions of the case. Under the transition services agreement, the people Disney hired help keep the platform running until the sale closes, and help with a wind-down or transition, for at most five months from September 18, at no charge for their time, with each person capped at 20 percent of their working hours. A vendor can look normal from the outside while its team already works for someone else.

What I would check before signing with an AI startup, and again every year:

  1. Data on exit. An export of my data in a format I can use, within a stated deadline, and a written deletion commitment. Here, user data was carved out of the Disney deal and stays with the estate. On October 14, 40 attorneys general (39 states and the District of Columbia) filed a notice asking that any buyer be ready to let consumers delete their data before any sale of it.
  2. The people. Who keeps my integration alive, and whether they still work there. The press release will not tell me.
  3. Liabilities that are not mine. A vendor under heavy legal and regulatory pressure can become unsellable with a good product. An unsellable vendor does not end in a merger. It ends in a wind-down.

If you build it

Two lessons, both from the declaration.

Know your compute cost per active user before you celebrate engagement. Time spent, the metric that makes a consumer AI product look great, is the one that bills you per token.

Count safety and compliance as product, because buyers do. Character built age inference and long-term harm detection while lawsuits and investigations piled up, and that work is in the Disney license. In legal tech, compliance is product work, not overhead. This filing shows the price of doing it late: the company keeps the liability, and a buyer only touches the parts after a court has separated them.

The court set a hearing on the bidding rules for October 30. As proposed, rival bids are due November 20, an auction would follow on November 23, and Disney can walk away if the sale has not closed by December 17.

In Disney's deal, the 12 million monthly users are not on the list. The code and the people are.

Sources

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