Character.AI Files for Chapter 11 as Disney Bids $20 Million for Parts

Character.AI bankruptcy: what the filing says

The Character.AI bankruptcy case opened on October 12 in the U.S. Bankruptcy Court for the District of Delaware, and Disney is already first in line to buy parts of the companion chatbot company. Character Technologies, which runs Character.AI, filed a voluntary Chapter 11 case that day, according to CBS News. A handful of outlets dated the filing October 13, but most reports say October 12.

Chapter 11 lets a company keep operating while it looks for a buyer under court supervision. This sale runs as a stalking-horse process, which means Disney's offer sets the floor and rival buyers can top it. Estimated assets and liabilities fall between $50 million and $100 million, according to Yahoo Finance.

The app keeps running during the case. If no buyer agrees to run it, the company says it would wind the business down.

Disney's $20 million opening bid and what it covers

Disney offered $20 million for a non-exclusive, perpetual license to certain intellectual property and company claims, Deadline reported. It is an opening number, and no deal is final. Disney also agreed to provide transition support through former Character.AI employees.

The more important detail is what the license leaves out. Forbes reported on October 19 that the proposed license excludes user data, conversations, training data, finished models, the brand and the consumer app. The same report says Disney has hired most of Character.AI's workforce. Former CEO Karandeep Anand joined Disney as chief technology officer in September.

Those exclusions come from one outlet's reporting, so readers should treat them as reported rather than confirmed. The court filings and sale documents will settle the point. If the exclusions hold, the most sensitive assets stay out of Disney's hands, and their fate depends on the bankruptcy court.

Disney's interest has a history. The studio sent Character.AI a cease-and-desist over unauthorized chatbots built on its characters, and that dispute ended without a lawsuit after the characters were removed, according to The Hollywood Reporter. Disney had also licensed its characters to OpenAI for Sora last year, a deal that was later unwound.

Why Character.AI says it cannot keep operating as is

The company cited high costs and potential litigation liabilities as reasons it cannot generate enough cash to keep operating in its current form. In a company statement, CEO Colin Adams said the company took "meaningful steps" to sustain the business despite "significant legal, regulatory, and operational headwinds," as CBS News reported.

The company's road to this point started with Google. Character.AI was founded in 2021 by former Google AI staffers Noam Shazeer and Daniel de Freitas, who have since returned to Google. After a Google licensing deal, the company shifted away from building foundation models and toward consumer chatbot products, according to Yahoo Finance. Deadline reported that the company had been valued at about $1 billion after a $150 million funding round.

Lawsuits are the other part of the story. Earlier in 2026, Character.AI and Google agreed to settle several suits from families who said teens died by suicide or self-harmed after using the platform. The company settled a wrongful-death suit from a Florida family, and Kentucky sued the company in January, per Deadline.

Who gets the chat logs if the sale closes

This is the question most users will ask, and the reporting does not answer it yet. If the Forbes account is accurate, user data and conversations sit outside Disney's proposed license. The reporting I reviewed does not say what happens to those records instead.

User numbers also conflict. One report cites about 12 million monthly active users, and another cites 163 million registered users since the 2022 launch. TechTimes puts the figure at 21.6 million U.S. accounts. Until a court filing gives a verified count, treat any single number as provisional.

Chat data has drawn scrutiny in other products, too. USA 24 has reported on how ChatGPT ads can target users by email and phone number, and on how Amazon's Bee wearables record conversations. The common question is who controls the recordings once the company changes hands.

State attorneys general want data rules in any sale

On October 15, a coalition of state attorneys general filed a notice in the bankruptcy case asking for safeguards on children's and consumers' data in any sale. Michigan, Connecticut, Delaware, Massachusetts and Washington are among the states involved. Delaware's filing is posted on the state AG's site.

Michigan Attorney General Dana Nessel made the core argument in a state press release: "Voluntary safety measures are not enough if they can be reversed by a business' next owner." That point matters here, because the safety features that protect teens today are a company choice, and a new owner could change them. Connecticut Attorney General William Tong put it more bluntly: "Their bankruptcy is no absolution."

The size of the coalition is unclear. Reports cite 23 states, 40 attorneys general who filed a notice of interest, and a 39-state group led by New Hampshire. The count varies by outlet, so verify it against the docket before repeating a number.

Precedent points the same way. In the 23andMe bankruptcy, state attorneys general opposed the sale of consumer genetic data, and a Texas-led coalition objected to RadioShack's sale of consumer data in 2015. Those cases suggest the bankruptcy court could impose data limits here. That is my analysis, not a ruling, and no court has yet ordered conditions in this case.

What users and parents should do now

If you or your child use Character.AI, the reporting supports a few concrete steps:

• Review what chat history and personal details you have shared with the app, and use any deletion option it provides for content you no longer want stored.
• Check whether your account is still active and whether a subscription is still billing. Reports say subscriptions remain active for now.
• Download any conversations or content you want to keep. The company says it would wind the business down if no buyer steps in.
• Parents should confirm that age and safety features are switched on. The attorneys general argue that voluntary restrictions can be reversed by a new owner, so a setting you rely on today could change.
• Treat any claim that Disney "owns" user chat histories as unverified until court filings confirm it.

What to watch before the November 24 sale hearing

The sale calendar is short, and the dates matter.

Source: MLQ. One report says the process could finish in late November or early December.

The first thing to watch is whether a rival bidder emerges before November 20, since Disney's $20 million is only an opening offer. Next, watch the sale documents for how user data, chat logs and training data are handled. The court's ruling on consumer-data conditions will matter most, and the state attorneys general have made it their central request.

Other questions remain open. It is unclear whether the platform shuts down if no buyer takes it on, and the status of the pending wrongful-death and state lawsuits after the filing is not settled. Character.AI's case is becoming a test of how an AI company facing youth-harm claims can exit the market, and of who gets to decide what happens to the conversations it collected.