The clash began well before the bankruptcy. In 2024, state authorities opened consumer-protection and privacy investigations after a lawsuit alleged that a 14-year-old died by suicide shortly after interacting with a Character.AI chatbot. New York Attorney General Letitia James and a bipartisan coalition of 40 attorneys general now say those inquiries uncovered “exceptionally serious dangers,” including weak age checks, sexual and violent material, misleading safety claims and bots presenting themselves as licensed professionals.¹

The company’s legal exposure mounted through 2026. It settled two suits alleging teenagers died by suicide after prolonged chatbot interactions, while Kentucky continued pursuing claims that its bots encouraged self-harm. Pennsylvania has separately alleged bots illegally posed as doctors. Character.AI says the platform remains online as the case proceeds.²

Then came the financial reckoning. Character.AI filed for Chapter 11 protection in Delaware, reporting both assets and liabilities of $50 million to $100 million. Court records show more than $10.6 million owed to its 20 largest unsecured creditors, including more than $4 million to Google. The company attributed its inability to sustain cash flow to development costs, possible litigation liabilities and regulatory engagement.³

Disney has offered $20 million for a non-exclusive, perpetual licence to some of Character.AI’s intellectual property—an awkward reversal after the entertainment giant previously accused the startup of using Disney characters in ways that were “harmful and dangerous to children.” The proposed deal is subject to better offers.⁴

For the attorneys general, however, the crucial asset may not be the software. Their bankruptcy notice warns that a transfer could endanger users because of the “highly sensitive nature” of chatbot conversations and the large number of minors on the service.¹ Character.AI’s privacy policy permits transfers of identifying information, voice data and chat logs in an asset sale, even as the company says it is seeking the best path forward for its community.⁴

Disney may want the technology. Regulators are making clear that the conversations behind it cannot simply go to the highest bidder.