Character.AI Bankruptcy: What Happens to Chats and User Data

Image: Pexels, used under the Pexels License.

If you've got years of chats in Character.AI, the company now belongs to a sale process in a Delaware bankruptcy court. Disney's opening bid leaves the chats out, and nothing filed so far says who else wants them. Export what you want to keep and delete the rest before bids are due. If you run a team, read this filing as a fire drill: it's what happens to your data the day any AI vendor you pay runs out of money.

Event date: October 12, 2026 (petition filed). First reports: October 13, 2026, by NBC News (carrying Reuters) and CNBC.

Update (October 19, 2026): On October 14, 40 state attorneys general, led by Colorado and including Wisconsin, filed a notice in the case asking the court and any buyer to protect children and users' chats. Wisconsin's Department of Justice announced its part on October 16. It isn't a formal objection yet: the states reserved the right to object to the sale and to ask for a consumer privacy ombudsman. We also read the sale papers and the privacy policy this time. The new sections are "The states step in" and "What we've read since", and the court deadlines are in the checklist for users.

What was filed

Character Technologies, Inc., the company behind Character.AI, filed a voluntary Chapter 11 petition on October 12, 2026. It's Case No. 26-11603 before Judge Brendan Linehan Shannon in the U.S. Bankruptcy Court for the District of Delaware. Stretto runs the case website as claims and noticing agent.

The company's own announcement says the point of the filing is "a court-supervised sale of all or substantially all of our assets." It expects that sale to be done "by the end of November or perhaps early December 2026." Then the sentence that matters for users: "If such a bid is unavailable, however, the platform will be wound down."

For now the app is up, and the company says subscriptions remain active with billing "unchanged for now."

Screenshot: Voluntary Petition, Case 26-11603 Doc 1, U.S. Bankruptcy Court for the District of Delaware (via Stretto).

The money: Disney, Google and the lawyers

Disney is the stalking-horse bidder, meaning it sets the floor price that other buyers have to beat. NBC News, carrying Reuters, says the bid is for "a nonexclusive perpetual license to some intellectual property" and that other bidders can top it. CNBC puts the price at $20 million and adds that the deal includes transition services through former Character.AI employees Disney hired. The company listed estimated assets and liabilities of $50 million to $100 million, per NBC.

The petition's list of the 20 largest unsecured creditors is a decent map of what an AI chatbot costs to run:

A cloud bill, a law firm and another cloud bill. The filing, as CNBC quotes it, says AI entertainment "has proven to be costly to develop and grow." The lawsuits haven't helped: Kentucky sued in January alleging the platform "preyed on children and led them into self-harm," and Pennsylvania sued alleging its chatbots posed as doctors. We track those cases in our state AG chatbot lawsuit tracker.

The states step in

On October 14, two days after the petition, Colorado Attorney General Phil Weiser led a coalition of 40 attorneys general (39 states plus the District of Columbia) in filing a "Notice of Interest and Reservation of Rights" in the case (Doc 33). Wisconsin is on the signature page. Its Department of Justice announced its part on October 16, with Attorney General Josh Kaul saying: "Companies that gather sensitive personal data must protect that data." The Verge first reported the filing on October 14, and WKOW covered Wisconsin's part on October 16.

Some headlines call it a challenge to the sale. It's a step short of that: a notice that puts the court, the company and any buyer on warning. The states say several of them opened investigations after a 2024 wrongful death lawsuit, and that they "worked with the Debtor on terms to address these issues but ultimately could not reach agreement" before the company filed. Citing the company's own records, they put its U.S. user base at more than 21.6 million accounts by March 2025, "including more than 2.1 million accounts with a declared age under 18."

What the states want any buyer to do, in the order the notice lists it:

1. Age assurance that doesn't rely only on self-declared birthdates.
2. Keep minors out of open-ended chats and away from harmful content in Stories and other features.
3. Remove characters that claim to be therapists, psychologists, doctors, attorneys or other licensed professionals.
4. Crisis protocols for self-harm, suicide, eating-disorder and substance-abuse content that "cannot be defeated with a simple click-through."
5. A privacy program, with consent before processing sensitive data such as health information disclosed in chats.
6. Account-level advertising opt-outs, and honoring opt-outs users already made.
7. No training or fine-tuning on chat content "beyond the uses to which consumers and parents validly consented."
8. Access to your data, and "allowing all consumers the opportunity to delete their data prior to any sale of that data."
9. No misleading claims about safety, suitability for minors, or whether characters are human.

The notice ends by reserving each state's right "to seek the appointment of a consumer privacy ombudsman under 11 U.S.C. §§ 332 and 363(b)(1), to object to any proposed sale, bidding procedures, or plan." Character.AI's chief executive, Colin Adams, told The Verge the filing "is not an accurate portrayal of the safety of our platform."

Who can buy user data out of a bankruptcy

This is where it gets specific. Section 363(b)(1) of the Bankruptcy Code says that if a company told individuals it wouldn't transfer their personal information, and that policy was in effect on the filing date, the estate "may not sell or lease personally identifiable information to any person unless" the sale is consistent with the policy, or a court approves it after a consumer privacy ombudsman has been appointed. Under Section 332, the U.S. Trustee has to appoint that ombudsman no later than 7 days before the sale hearing.

So the answer for Character.AI users turns on one document: the privacy policy that was live on October 12. We read it on October 19. The policy online carries an effective date of July 1, 2026, before the filing, and has a "Business Transfers" line: "We may disclose certain information, in connection with or during negotiations or closing of any merger, sale of company assets, financing, or acquisition of all or a portion of our business to another company." That reserves a transfer in a sale instead of ruling one out. On our reading, the Section 363(b)(1) bar doesn't kick in by itself here, which is why the states reserved the right to ask for an ombudsman anyway.

The FTC has already shown how it reads this. In the 23andMe bankruptcy, Chairman Andrew Ferguson's letter of March 31, 2025 said that "consistent with Section 363(b)(1) of the Bankruptcy Code, these types of promises to consumers must be kept," and that "any purchaser should expressly agree to be bound by and adhere to the terms of 23andMe's privacy policies." Chat logs from a companion app aren't genetic data, but they're often just as personal.

Image: Pexels, used under the Pexels License.

What we've read since, and what's still open

On October 14 we could read only the petition. The Stretto docket opens in a browser, and the sale papers answer most of what we flagged then:

• Disney's deal leaves the chats out. The license attached to the sale motion (Doc 15-2, section 3.2) excludes "Licensor's end user data or databases, any personally identifiable information of Licensor end users, any input entered by Licensor end users," the outputs generated for them, and training data and finished models. Disney is licensing technology, not the user base.
• Other bidders can ask for more. Adam Dunayer of Houlihan Capital, the company's proposed investment banker, told the court that bidders "may also seek to acquire the Debtor's other Assets." Nothing filed so far names a bidder for the user data.
• The privacy policy reserves transfers in a sale (see above).
• Still open: no consumer privacy ombudsman appears on the docket through Doc 54 (October 15), the last entry listed when we checked on October 19. The bidding procedures aren't approved yet.

Screenshot: Disney license agreement, section 3.2, Case 26-11603 Doc 15-2, page 8, U.S. Bankruptcy Court for the District of Delaware (via Stretto).

What the company does say is that your information "continues to be protected under our Privacy Policy" and that "you can delete your account or export your data through the app or the Character.ai website."

If you use Character.AI

The court calendar, as of October 19. "Proposed" dates come from the company's sale motion and can change when the judge rules on the bidding procedures.

Screenshot: Notice of Hearing on the bidding procedures motion, Case 26-11603 Doc 50, U.S. Bankruptcy Court for the District of Delaware (via Stretto).

1. Export now. It's the only step that doesn't depend on a buyer or a judge.
2. Delete what you'd mind a stranger reading, before the bid deadline. The states asked that users get a chance to delete before any sale of their data. Nothing yet says the court will order it, so don't wait for a prompt.
3. If you want to object, mind the dates in the table. Objections are written, filed with the clerk at 824 Market Street, 3rd Floor, Wilmington, Delaware 19801, and served on the company's lawyers and the U.S. Trustee by the deadline; the hearing notice lists their addresses. For most users, a note to your state attorney general's consumer protection office is the more practical route, since the attorneys general are already parties.
4. Watch the docket. The sale notice won't reach your inbox: the company plans to mail it to creditors, state attorneys general and the FTC, publish it once in the national edition of USA Today, and post it on the Stretto case page.

For every AI vendor your team pays

Character.AI is a consumer app, but the mechanics are the same for the chatbot in your support desk or the AI notetaker in your meetings. Two points from the code shape what you can do about it.

First, Section 363(b)(1) is written around a policy disclosed "to an individual." For your company's data under a business contract, your protection is mostly the contract. Second, Section 365(e)(1) says a contract may not be terminated or modified "solely because of" a clause tied to the debtor's insolvency or the filing. A clause that only kicks in when the vendor goes bust may not do much once it has. The rights that work are the ones you use while the vendor is healthy.

If your company has a contract with Character.AI itself, watch for the November 4 notice in the calendar above. It lists the contracts a buyer may take over, and the proposed deadline to object to yours is November 18.

Image: Pexels, used under the Pexels License.

Five questions to ask about each AI vendor holding your data:

Character.AI's own policy is a live example of the bad answer in row 2: its "Business Transfers" line lets it disclose information in a sale of company assets.

And a clause to paste into your redline. It's our drafting, not a court-tested form, so run it past whoever signs your contracts:

Data Portability and Change of Control.
(a) At any time during the Term, Customer may export all Customer Data
(including prompts, outputs, uploaded files and configuration) in a
machine-readable format, at no additional charge, within 5 business days
of request.
(b) Provider will give Customer at least 30 days' written notice before
any sale, assignment or transfer of Customer Data to a third party,
including as part of a merger, asset sale or insolvency proceeding.
(c) Any successor or acquirer of Customer Data must agree in writing to
be bound by this Agreement's data protection terms, and Customer may
instead require deletion of Customer Data with written certification.

Part (a) is the one that matters most, for the 365(e) reason above: you use it while the vendor is solvent. Our contract redline template has the deletion and export clauses this builds on, and the AI vendor DPA tracker links straight to 25 vendors' DPAs.

Our take

The headlines are about Disney, and $20 million for a nonexclusive license is a small number for a company that was a household name in AI. The part worth your attention is quieter. Disney took the technology and left the chats. That leaves a database of intimate conversations with no named buyer, a sale process the company's banker expects to last "nearly six weeks," and a privacy policy that allows a transfer in a sale. The attorneys general stepping in is good news for users. It isn't a guarantee: their nine asks are a wish list until the judge writes them into an order.

We'd treat every AI vendor the same way: assume it might not exist in a year, export on a schedule, and make the contract say what a buyer inherits. That's cheap to do now and impossible to do after the petition.

Community reaction

In r/CharacterAI, the day-one mood was attachment more than privacy. "Just hoping the app stays because idk what I'd do without it," wrote one user. Another, who said they'd been writing with the same bot for years: "I am going to be devastated when or if it is gone."

https://www.reddit.com/r/CharacterAI/comments/1x53gm6/i_dont_want_cai_to_go/

Related Reading

• Texas Sues OpenAI and Sam Altman: What the Suit Demands
• AI Vendor Contract Redline Template: 12 Clauses to Add or Fix (2026)
• AI Vendor Due Diligence Checklist (2026): 30 Questions Before You Sign
• AI Vendor DPA Tracker 2026: 25 Tools with GDPR DPA Status, Training Policy and Direct Links
• AI Data Retention Policy Template for 2026: What to Keep, What to Delete
• AI Vendor Contract Red Flags: 12 Clauses That Create Liability for Enterprise Buyers in 2026
• State AG AI Chatbot Lawsuits Tracker
• Italy Fines Character.AI €158K Over Child Safety Failures
• Anthropic Export Ban: What the 19-Day Fable 5 Shutdown Means for Your AI Vendor Policy