Disney required Character.AI to go through bankruptcy to finalize a deal for its staff and technology, Wired reports

What happened

Chatbot company Character.AI filed for chapter 11 bankruptcy on October 12, and Wired reported that the filing is tied to a deal with Disney. According to a motion from Character.AI's legal counsel, Disney required that the deal be "fully consummated" through bankruptcy because of the startup's shrinking cash and its litigation and regulatory risks.

Character.AI's newly appointed CEO said in a court declaration that the goal was a "consensual resolution" with personal injury claimants and states investigating the company, while getting the most value for shareholders. Disney declined to comment to Wired. More coverage of the industry is on our AI and tech page.

How the deal is structured

Court filings describe two linked transactions, one before the bankruptcy and one after it. Wired reported that the arrangement appears to be a variation on what some call a "reverse acquihire," in which a buyer hires a target company's key staff and licenses its technology without a formal merger.

The first payment and hires

In September, Disney paid Character.AI $5.5 million plus a refundable $2 million good faith deposit, according to the filings. Disney also hired the majority of the startup's employees, including the CEO, and agreed to let some of them help keep Character.AI running for five months.

The license auction

Through the bankruptcy, Disney is seeking a perpetual, worldwide, nonexclusive license to a wide range of Character.AI code and tools, including its trust and safety moderation stack, training infrastructure and age-prediction technology. User data and the company's website are not on the list. The license will be auctioned in the coming months, and if Disney wins and courts approve, it will pay an additional $12.5 million. If not, Disney gets its $2 million deposit back plus a breakup fee.

What happens to employees

To keep the process competitive, Disney agreed that a winning bidder could interview and possibly make offers to up to 80 percent of certain employees it hired from Character.AI, with Disney choosing which ones. Experts told Wired that moving workers between companies within months is unrealistic and that the deal may not be easy to unwind.

Why the legal claims matter

Wired reported that the deal appears designed so that what remains of Character.AI keeps responsibility for its legal battles. Disney drafted a proposed court order stating the process is not a merger and that Character.AI stays responsible for any liability, including legal claims.

Earlier lawsuits and Google

In August 2024, Google reportedly paid $2.7 billion to license Character.AI's technology and hired its founders. Google was later named as a defendant in several lawsuits, including one alleging a 14-year-old's death was linked to the chatbot. A judge found the plaintiff sufficiently alleged Google could be liable. Google and Character.AI agreed in principle in January to settle those cases, and a court referee approved each settlement on October 11, a day before the bankruptcy filing.

The state investigation

A coalition of state attorneys general began investigating Character.AI in November 2025, and by the bankruptcy filing 46 states and territories were involved. A notice filed for 40 states by the National Association of Attorneys General cited screenshots of chatbots encouraging minors to hide self-harm injuries. A Character.AI spokesperson said the filing is not an accurate portrayal of the platform's safety, and the filings say no agreement with the states was reached.

What experts say

John Newman, a University of Memphis law professor and former Federal Trade Commission official, told Wired the deal is extremely unusual and built in a way existing corporate law safeguards were not designed to handle. "It's bad for society to let companies exercise control without responsibility," Newman told Wired.

What to watch next

• The auction of the Character.AI technology license, expected in the coming months.
• Whether Character.AI and a committee of unsecured creditors pick Disney as the winning bidder, and whether courts approve the deal.
• Whether the states that filed a notice of interest challenge the bankruptcy plan, as they say they reserve the right to do.
• Court action on the proposed "363 Free and Clear Order" at or before closing.