Character Technologies, the company behind the Character.ai chatbot app, filed for Chapter 11 bankruptcy on Monday, Oct. 12, in the U.S. Bankruptcy Court for the District of Delaware. Chapter 11 usually lets a company keep running its business while it works out, under a court's eye, how to pay what it owes. Character.ai is using it to sell all or nearly all of what it owns, and it hopes the sale brings an offer that keeps the app going. In a court filing, the company put both its assets and its debts somewhere between $50 million and $100 million, according to a news report.
The company says that over the past year it tried to keep the business going "amid significant legal, regulatory, and operational headwinds," and that its board decided a court-supervised sale gives it the best chance to get the most value. It did not spell out those headwinds. The company does face legal trouble: Kentucky's attorney general sued it in January, alleging that its platform encouraged suicide and self-injury and exposed minors to sexual conduct.
Before filing, Character.ai struck a deal with Disney Worldwide Services, part of Disney, whose offer would be the opening bid: the offer other bidders must top to be picked instead. The court still has to approve that arrangement and the bidding rules. Disney would pay $20 million for permanent rights to use some of Character.ai's intellectual property, and to some legal claims the company holds. Other buyers could get the same rights. The deal would not hand Disney the app or the company, and Character.ai has not said which intellectual property or claims are included.
As part of the price, Disney, which has hired some former Character.ai employees, would provide their help so Character.ai can run the app safely for a limited time during the sale. Other bidders can make higher or better offers, and Character.ai expects the sale to close in late November or early December.
For people who use the app, Character.ai says it is still running and all services work for now. Paid subscriptions remain active and billing is unchanged for now, and the company says it intends to tell subscribers ahead of time if paid features change. It says its privacy and data security practices are unchanged, and users can delete their accounts or download their data through the app or website.
If no buyer agrees to keep the app running, Character.ai says the app will be shut down. It is not yet clear who else might bid, whether a new owner would keep the app as it is, what would happen to the characters and chats people have made on it, or what becomes of Kentucky's lawsuit.