The Character.AI bankruptcy has turned users' chat logs, including conversations from minors, into a fight over who gets them. State attorneys general want privacy conditions attached to any buyer, and a Disney bid for part of the company is already on the table.
The chatbot startup filed for Chapter 11 in the US Bankruptcy Court for the District of Delaware after facing a wave of claims that its app contributed to teen mental health problems and suicides, CNN reported. Reports disagree on the filing date. Most sources cite October 12, while CNN describes a filing on Tuesday, October 13. The court's notice of commencement was filed October 15.
What the filing says about the company's finances
The company's chief executive, who is not named in the CBS News report, blamed "significant legal, regulatory and operational headwinds" for its financial problems. In a company statement, Character.AI said: "As we navigate this process, maintaining a safe and engaging user experience for our Character.ai community remains a top priority."
The platform will keep running during the court-supervised sale, and subscriptions remain active. If no buyer keeps the platform going, the company says it will be wound down, according to its update on the company blog.
Character.AI was founded in 2021 by former Google AI staffers Noam Shazeer and Daniel de Freitas. Startup Fortune reports a valuation of about $1 billion in a 2023 funding round, and the bankruptcy filing puts its assets between $50 million and $100 million. That distance helps explain why a sale price in the tens of millions is on the table.
The legal problems also reach Google, which had a licensing deal with the company and joined the early-2026 settlements, according to CBS News. CNN reports that Character.AI settled five cases earlier in 2026, including the Garcia case.
Disney's $20 million bid and what a stalking horse means
Disney is the stalking-horse bidder, offering $20 million for a non-exclusive, perpetual license to certain Character.AI intellectual property and claims, plus transition services. Bloomberg Law and CBS both describe the deal, but they frame it differently. CBS says Disney "has agreed to pay" $20 million, while Startup Fortune calls it an offer.
A stalking-horse bid is an initial offer that sets a baseline for the sale process. Other bidders can top it, and the court must approve the final buyer. Disney's bid is therefore not a closed deal, and whether a higher bidder emerges is still open.
The structure matters. The reporting describes a license to certain intellectual property and claims, not a purchase of the whole company. It does not say how user conversations would be handled under that license, and that gap sits at the center of the states' objections.
Why state attorneys general want privacy conditions
A secondary explainer from Captain Compliance reports that New York Attorney General Letitia James and other states say Character.AI holds private chats, voice calls, mental health disclosures, ages and device data. The same report says this data could transfer to a new owner through the bankruptcy.
The states asked that any sale include effective age verification, a full privacy program, limits on training AI with private conversations without valid consent, and a way for users to access and delete their information before any sale. The report also says Character.AI tells users they can delete their data.
USA 24 has not confirmed the date of the states' public filing or statement, and the full list of states that joined has not been verified. Treat that timing as unverified until the bankruptcy docket or a state release is checked.
Each demand targets a different risk. Age verification addresses the minors at the center of the lawsuits. Limits on AI training would restrict what a buyer can do with old conversations. Access and deletion rights would give users a chance to act before ownership changes hands.
This is a separate matter from the case against OpenAI. Eight states sued OpenAI in mid-October over child safety claims, each in its own state court, according to CNBC. Still, it shows state officials pressing AI companies over minors. USA 24 has also covered Texas's lawsuit against OpenAI and Sam Altman over ChatGPT safety for minors.
Can a buyer take users' chat logs?
No ruling has been reported on this question, and it may be the most important one in the case. Federal bankruptcy law gives courts some tools for sales involving personal data, including the option to appoint a consumer privacy ombudsman in certain cases. Whether the court uses that option here is unknown.
Creditors, state regulators and plaintiffs' lawyers all have a stake in the outcome, and they want different things. Creditors want the highest recovery. Regulators want protections for users. Plaintiffs want their claims paid from whatever the company is worth.
The case also fits a broader debate. A BBC analysis published October 29 argues this could be the first of many AI bankruptcies to raise the same question. That is an argument, not a finding. Lawmakers are already weighing related issues, and House Democrats have proposed a no-bailout rule for insolvent AI companies.
Federal bills aimed at minors' AI safety, including the GUARD Act and CHATBOT Act, have stalled in Congress, according to TechTimes. States are moving on their own. New York Governor Kathy Hochul signed a youth AI chatbot safety bill on October 28, per IAPP.
What users and parents can do now
The steps below are general guidance. The details depend on the court process, and the reporting does not describe the exact menus or deadlines.
- Check the app for a data-deletion option. The company says users can delete their data, so look in the account settings for chat history and personal information controls.
- Save what you want to keep first. Deletion may be permanent, so export or record any conversations you may need for personal records or a legal claim before you delete them.
- Watch the court docket. Character.AI's court filings are hosted through the claims agent Stretto. Look for notices of the sale hearing and any deadline to object or file a claim.
- Talk with your teen. Parents should find out which account a child used, what age and device information the app holds, and whether the child wants chats removed. Explain what deletion does before you act.
- Ask a lawyer about deadlines. If you believe you have a claim tied to the app, get advice soon, because bankruptcy deadlines can pass quickly.
What to watch next in the Character.AI sale
Four things will shape the outcome. The first is whether Disney's $20 million stalking-horse bid holds up or a higher bidder emerges. The second is whether the platform keeps running through the sale. The third is how the bankruptcy court responds to the states' demands on age verification, privacy programs and AI training. The fourth is whether the states' filing and its list of signatories are confirmed in the docket or a state release.
The next filings should answer whether a buyer can take user conversations at all. If the court approves a sale with strict privacy conditions, it could become a template for other AI companion apps that fail. If the court approves a narrow license with few conditions on user data, the fight will likely move to state regulators and plaintiffs.
