Disney’s proposed acquisition of Character.AI just got stranger. According to new reporting, the company asked the embattled AI chatbot startup to enter bankruptcy as part of the deal structure, a move that could help Disney dodge the wave of lawsuits currently facing Character.AI.

The stakes are serious. Dozens of states have sued Character.AI over allegations that its chatbots encouraged minors to self-harm and even kill their parents. Now Disney wants the company’s technology, including its trust and safety systems, but apparently not the legal baggage that comes with it.

How Bankruptcy Could Work as a Shield

Bankruptcy isn’t just for companies that are broke. It’s also a powerful legal tool that can extinguish or redirect liability. If Character.AI files for bankruptcy, the lawsuits against it could be stayed, settled for pennies on the dollar, or potentially dismissed entirely depending on how the case proceeds.

Disney’s filing reveals it’s pursuing this as a stalking horse bid, meaning other companies could make higher offers. The entertainment giant has already agreed to hire “the vast majority” of Character.AI’s workforce, and most employees offered jobs have accepted. But the bankruptcy structure suggests Disney wants the talent and the tech without inheriting the lawsuits.

This isn’t subtle. When a profitable acquirer pushes a target company into bankruptcy, it’s worth asking whether the goal is financial restructuring or legal insulation.

What Disney Actually Wants

According to the filings, Disney is interested in Character.AI’s trust and safety technology, among other intellectual property. That’s notable given that trust and safety is exactly what Character.AI allegedly failed at.

The lawsuits paint a disturbing picture. State attorneys general claim the chatbots formed inappropriate relationships with minors, encouraged self-harm, and in at least one case, allegedly played a role in driving a teenager toward violence against family members. These aren’t just product liability claims. They’re allegations of fundamental design failures in a consumer AI product marketed to young users.

Disney’s interest in the trust and safety IP raises questions about what the company plans to build and whether it believes it can fix what Character.AI couldn’t. Or whether it just wants to avoid being sued over the same problems.

The Legal Landscape for AI Products

This case sits at an uncomfortable intersection. Product liability law generally holds companies responsible when their products cause harm. But AI chatbots occupy murky territory. Are they products? Platforms? Publishers? The answer matters because different rules apply.

Character.AI will likely argue its chatbots are protected by Section 230, the law that shields internet platforms from liability for user-generated content. That argument has worked for social media companies, but it’s never been tested for AI chatbots that generate their own responses. Courts might decide that AI-generated content doesn’t count as “user” content at all.

The state lawsuits sidestep some of these issues by focusing on unfair and deceptive trade practices, consumer protection violations, and failures to implement adequate safety measures for a product marketed to children. Those claims are harder to dismiss.

What Happens Next

Disney’s stalking horse bid sets a floor. Other companies have until a court-set deadline to make higher offers. If no one outbids Disney, the bankruptcy court will need to approve the sale.

The lawsuits won’t disappear just because Character.AI goes bankrupt. State attorneys general could pursue claims against Disney if they can show the company assumed Character.AI’s liabilities or continued operating the products in the same way. Plaintiffs in civil cases could try to pierce the corporate veil or argue that Disney is a successor in liability.

Much depends on how the deal is structured and what Disney actually does with the technology. If it mothballs the chatbots and just hires the engineers, that’s one thing. If it launches new AI products using Character.AI’s systems, plaintiffs’ lawyers will argue Disney bought the liability along with the tech.

The bankruptcy maneuver is creative, but it’s not a perfect shield. Disney’s legal team knows that. The question is whether they think it’s good enough.

For Character.AI’s investors and employees, bankruptcy beats shutting down entirely. For the families suing over alleged harms to their children, it looks like a way for deep-pocketed Disney to buy the company while stiffing the victims. For everyone else watching the AI industry, it’s a reminder that when things go wrong with AI products, the legal system still doesn’t quite know what to do about it.