Character.AI has filed for Chapter 11 bankruptcy protection and plans to sell substantially all of its assets, with Disney offering $20 million as a "stalking-horse bidder" for select intellectual property and company claims. However, the company said Disney's bid is subject to "higher or better offers." Deadline reports: The company, which allows users to create and interact with AI-generated avatars, said it made the filing in U.S. Bankruptcy Court for the District of Delaware. It said it hopes the process will allow it to "facilitate a value-maximizing sale of all or substantially all" of its assets. The Character.AI platform will continue to operate during the bankruptcy. The Disney agreement, reached prior to the filing, would give the media giant a non-exclusive perpetual license of select intellectual property and company claims from Character.AI. Disney would pay $20 million and provide resources during a transition period as the company explores a sale. [...] Character.AI said it is aiming to conclude the sale process by late November or early December. Character.AI has faced a series of controversies over the past year or so. Most notably, the company settled multiple lawsuits alleging its chatbots encouraged self-harm and suicide among teenagers, including a high-profile case involving 14-year-old Sewell Setzer III. The company also faces lawsuits from Kentucky, which alleges its chatbots encouraged self-harm, and Pennsylvania, which claims the bots illegally impersonated licensed doctors. The latter allegations follow earlier complaints that Character.AI's therapy chatbots engaged in the unlicensed practice of medicine. In September 2025, Disney accused Character.AI of copyright infringement and using its characters in chatbots that were "sexually exploitive and otherwise harmful and dangerous to children," prompting their removal from the platform. These mounting legal challenges and regulatory scrutiny ultimately contributed to this eventual bankruptcy filing.Read more of this story at Slashdot.