Executive Summary

The Character.AI bankruptcy began on October 12, 2026, when Character Technologies, the company behind the chatbot app, filed for Chapter 11 in Delaware and put its assets up for sale. Disney's $20 million opening bid excludes user data, but the rest of the company, including the app and the chats of about 12 million monthly users, is also for sale. The US Trustee and a coalition of 39 states plus the District of Columbia asked for a consumer privacy ombudsman. On October 30, 2026, Judge Brendan Shannon "strongly encourage[d]" one but did not order it.

The Promise in the Filing

On October 27, 2026, a Justice Department lawyer filed an objection in the Character.AI bankruptcy that quotes a chatbot: "Your privacy is my top priority. Anything you share here stays just between you and me. That's a promise."

That line was not company policy. It was one of several replies researchers recorded when they asked Character.AI personas whether they would share what users said, published in a January 2026 report by Ellen Hengesbach and Ben Winters. State attorneys general cited them first, and the United States Trustee's objection (Docket 69) repeated them.

The Character.AI bankruptcy now turns on the gap between what a chatbot told users and what a bankruptcy sale allows. Who gets the chats of a platform with about 12 million monthly users and more than 2.1 million US accounts registered with an age under 18?

The Road to Chapter 11

Character.AI was founded in late 2021 by former Google engineers Noam Shazeer and Daniel De Freitas. In August 2024 Google licensed the company's models in a deal reported at $2.7 billion, and both founders returned to Google.

Litigation followed. In October 2024 a Florida mother sued in Garcia v. Character Technologies, alleging that a chatbot cultivated an emotionally dependent relationship with her 14-year-old son, Sewell Setzer III, before he died by suicide. Other family suits followed. These are allegations, and CBS News reports that Character.AI and Google settled family lawsuits in early 2026. Kentucky filed a state enforcement action on January 8, 2026.

In its sale motion (Docket 15), Character.AI says high costs, "potential litigation-related liabilities and regulatory engagement" left it short of cash. A banker hired in August 2025 approached about 28 potential buyers, who said "the litigation and regulatory overhang on Character was too great." One proposal came back, and it was not actionable.

The company was losing $8 million to $9 million a month, according to PYMNTS' reading of CEO Colin Adams's sworn declaration. TechCrunch reports assets and liabilities each of $50 million to $100 million.

What Is Disney Buying, and What Is It Not?

On September 18, 2026, Character.AI signed an exclusivity and prepayment agreement with Disney Worldwide Services. Disney hired most of the workforce, including the chief executive, whom TechCrunch identifies as Karandeep Anand, and paid $7.5 million up front, including a $2 million refundable deposit.

Disney's $20 million stalking-horse bid, the opening offer that rival bidders must beat, buys a perpetual, worldwide, non-exclusive license to Character.AI's technology and patents, plus certain legal claims against the employees it hired. It does not buy the app, the brand or the users. The US Trustee's objection says the deal does "not appear to include" personally identifiable information, and a revised sale notice filed October 30 adds a footnote excluding such data from Disney's assets, PPC Land reports.

The data question remains because the company is selling "all or substantially all" of its assets, including the platform. The sale motion says that if no higher offers arrive, or the Disney deal is not approved, "Character's platform will be wound down."

Can a Bankrupt Company Sell User Data?

Yes, sometimes. US bankruptcy law treats customer data as an asset but limits sales of "personally identifiable information" (PII). Congress added these limits in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, after the online toy retailer Toysmart tried in 2000 to sell customer data it had promised to keep private.

The rule sits in Section 363(b)(1) of the Bankruptcy Code. If a company's privacy policy, in effect on the day it filed, prohibits transferring PII to unaffiliated parties, the company cannot sell that data unless one of two things is true:

  • the sale is consistent with the privacy policy; or
  • a consumer privacy ombudsman is appointed, and the court approves the sale after finding no showing that it would break nonbankruptcy law.

Section 101(41A) defines PII narrowly: names, home and email addresses, phone, Social Security and credit card numbers, plus linked details such as birth dates. Chat transcripts are not on the list, which is one reason the US Trustee also invokes "other sensitive personal information."

What does a consumer privacy ombudsman do?

Under 11 U.S.C. § 332, the US Trustee appoints a disinterested person at least 7 days before the sale hearing. The ombudsman advises the judge on the privacy policy, on consumers' potential losses, gains and costs, and on alternatives that would reduce privacy losses. The role is advisory: the judge still decides.

What happened in earlier cases?

In RadioShack's 2015 bankruptcy, the Federal Trade Commission's consumer protection director, Jessica Rich, wrote to the court-appointed ombudsman. She recommended that the data go only to a buyer in substantially the same business, and that the buyer honor RadioShack's original privacy promises.

In 23andMe's 2025 bankruptcy, ombudsman Neil Richards called the genetic database "one of the most — if not the most — sensitive collections of data about identified people ever sought to be discharged in bankruptcy," The Record reported. He recommended separate, affirmative customer consent. The court still approved a $305 million sale to the nonprofit TTAM Research Institute, which committed to keep 23andMe's privacy policies "in perpetuity".

The Fight Over an Ombudsman

The states moved first. On October 14, 2026, 40 attorneys general filed a notice of interest and reservation of rights (Docket 33). We counted 39 states and the District of Columbia among the signatories. It says that by the company's own records, more than 21.6 million US accounts had been created by March 13, 2025, including more than 2.1 million with a declared age under 18.

The states argued that chat histories are hard to de-identify and that, without adequate age verification from 2022 through 2025, minors' data was likely misclassified as adult data. They listed nine conditions for any buyer, including limits on using chats to train models and a chance for "all consumers" to delete their data "prior to any sale." They also reserved the right to seek an ombudsman.

New York Attorney General Letitia James was blunter in her October 14 statement: "now those conversations could be sold off to the highest bidder."

On October 27, US Trustee Andrew R. Vara, the Justice Department's bankruptcy watchdog for Regions 3 and 9, asked the court to order an ombudsman. His objection says the July 1, 2026 privacy policy allows the company to "disclose" information in a sale but is "ambiguous" about selling it. In another place, it says "we do not sell personal information for monetary consideration." The objection notes that the policy was updated "while the Debtor was apparently actively seeking to sell its assets."

The objection also calls Character.AI a "super intelligence ('SI') entertainment platform." Federal agencies began using "Super Intelligence (SI)" in place of "AI" after a September 29, 2026 executive order; the technology is the same.

The company replied the same day (Docket 73) that its policy "permits the sale and transfer of user data," but said it would "consent to the appointment of a CPO under appropriate circumstances," according to PPC Land's review of the filing. On October 29 the states joined the Trustee's request (Docket 80), saying an ombudsman is necessary for any sale that may include data of the "approximate 12 million active users or past users (including minors)," PPC Land reports.

The October 30 Ruling

On October 30, 2026, Judge Shannon approved the bidding procedures, subject to revisions, with Disney as the opening bidder. He declined to order an ombudsman. According to Bloomberg's report of the hearing, he said he would "strongly encourage" the company to bring in an expert to examine the privacy concerns, and that doing so would address the states' worries.

The procedures keep a $21.7 million minimum competing bid and $700,000 in bid protections for Disney. The judge overruled the states' objections that the terms favored Disney but left room to raise some of them again at the final sale hearing. PPC Land reports that the further revised order says nothing about an ombudsman.

Which Character.AI Bankruptcy Dates Are Right?

Published timelines conflict, and we found three sets of dates in the record:

  • The original schedule. The October 13 sale motion proposed bids by November 20, an auction on November 23 and a sale hearing on November 24, 2026. Much coverage still uses these dates.
  • The revised schedule. On November 3, the company submitted a further revised order for signature (Docket 96). PPC Land reports it sets objections for November 18, bids for noon ET on November 24, the auction for December 1 and the sale hearing for December 3 and 4. We could not read Docket 96 or confirm its entry, so treat these dates as reported.
  • December 17. KQED described December 17 as the "closing deadline." The sale motion shows it is the outside date in Disney's agreement: the deal must close by December 17, 2026.

The Stakes for Users and Minors

Users averaged about 120 minutes a day on Character.AI, according to the CEO's declaration as cited by the US Trustee. The states' notice says chats contain "emotional and health-related disclosures." It adds that the company's chatbots included personas calling themselves psychologists, therapists and doctors.

Three risks stand out in the filings: a buyer could use chats in ways users never expected; chats used as training data could reproduce the harmful patterns the lawsuits allege; and minors' records may be mixed in with adult data.

"Our most sensitive personal information is not an asset to be bought and sold, especially during a fire sale after bankruptcy," Mario Trujillo, a senior staff attorney at the Electronic Frontier Foundation, told KQED.

The company says its privacy policy already permits a transfer in a sale. No court has decided that. As of November 5, 2026, we found no public report of any bidder for the user data or the platform.

What Can Users and Parents Do Now?

  • Export, then decide. Character.AI says users can export data or delete their account in the app or on the website, CBS News reports. KQED reports that exports can take three to four weeks and download links expire after seven days.
  • Delete if you want out. Robbie Torney of Common Sense Media advised: "Delete your account now and download your chats first if you want to keep them." Residents of states with privacy laws, such as California, also have statutory deletion rights.
  • Do not wait for a letter. A company filing reported by PPC Land says Character.AI does not treat its approximately 163 million current and past users as creditors owed formal notice; it plans blog posts and in-app links instead.
  • Know what is not guaranteed. The states asked that everyone get a chance to delete before any sale. That is a request, not a court order, and we found no court-set deadline for deletion requests.

What Happens Next?

Dates marked "reported" come from the revised order as PPC Land describes it.

  • November 18, 2026: sale objection deadline (reported).
  • November 19, 2026, 1:00 p.m. ET: creditors' meeting by Zoom, where a company representative answers questions under oath (confirmed on the Stretto case site).
  • November 24, 2026: bid deadline (reported).
  • December 1, 2026: auction, if rival qualified bids arrive (reported).
  • December 3–4, 2026: sale hearing, where preserved objections and any renewed ombudsman request would be heard (reported).
  • December 17, 2026: outside closing date in Disney's agreement.

AI Coalition Network Perspective

The Character.AI bankruptcy is a stress test the 2005 privacy rules were not built for. They protect names and email addresses, not years of confessional conversation with a machine that sometimes promised confidentiality.

An ombudsman costs little compared with the risk. The judge was right to encourage one, and the company has said it would consent "under appropriate circumstances." It should seek that appointment now, so every bidder knows the privacy terms in advance.

The wider lesson is for every AI companion company: if a product invites intimate disclosures, especially from teenagers, its privacy policy should say plainly what happens to them in a sale.

Frequently Asked Questions

What happens to my Character.AI chats in the bankruptcy?

As of November 5, 2026, no bidder for Character.AI user data had been publicly reported. Disney's $20 million stalking-horse bid excludes user data and covers only a non-exclusive technology license. Other bidders may bid for the platform, and its data, by the bid deadline. If no buyer continues the platform, the company says it will be wound down. Users can export or delete data now.

Is Character.AI shutting down?

Not yet. Character.AI kept operating after its October 12, 2026 Chapter 11 filing, and subscriptions continued. Its sale motion says the platform "will be wound down" if the sale process produces no buyer that continues it. The auction is reported to be scheduled for December 1, 2026, and Disney's deal must close by December 17, 2026.

Did Disney buy Character.AI?

No. Disney is the stalking-horse bidder, offering $20 million for a perpetual, non-exclusive license to Character.AI technology and patents, not the company, app, brand or user data. Before the filing, Disney hired most of Character.AI's staff under a September 18, 2026 agreement. Rival bidders must offer at least $21.7 million to compete for those assets.

What is a consumer privacy ombudsman?

A consumer privacy ombudsman is a neutral expert appointed under Section 332 of the US Bankruptcy Code when a company wants to sell personal data in a way its privacy policy may not allow. The ombudsman advises the judge on privacy risks, costs and safer alternatives before the sale hearing. Ombudsmen served in the RadioShack (2015) and 23andMe (2025) bankruptcies.

How many states objected in the Character.AI bankruptcy?

The October 14, 2026 notice was signed by 40 attorneys general, including New York's Letitia James, representing 39 states and the District of Columbia. Press counts of later objections vary from 32 to 41, depending on the filing. PPC Land reports that Florida, which did not sign the notice, has objected separately.

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