# Character.AI files for Chapter 11: what happens to users and their chats

> Character.AI is in bankruptcy court to sell itself, with Disney's $20 million bid as the floor. The app stays up for now, but may shut if no buyer will run it.

News · Big Tech · Published 20 Oct 2026 · Machine Notes
Source page: https://machinenotes.com/news/character-ai-chapter-11

## Why it matters

- Character.AI is one of the largest AI companion apps, and its users' chats are now part of a company being sold.
- The company says the platform will be wound down if no bidder offers to keep it running.
- The case shows how lawsuits and regulators over chatbot safety can decide whether an AI company survives.

Character.AI filed for Chapter 11 bankruptcy on 12 October 2026 so that it can sell itself under court supervision. The app is still running and the company says user data is handled as before, but if no buyer offers to keep the service going, it will be shut down.

## The filing

Character Technologies, Inc., the company behind Character.AI, filed a voluntary Chapter 11 petition in the US Bankruptcy Court for the District of Delaware on 12 October 2026. The case number is 26-11603, and Judge Brendan L. Shannon is assigned to it. The first hearing on the company's early requests was set for 14 October in Wilmington.

In a blog post the company said its board chose a court-supervised sale after reviewing the alternatives. It expects the sale to finish by the end of November or perhaps early December 2026.

## Why it filed

The company's own filings blame costs and legal risk. CNBC quotes the filing as saying AI entertainment has been "costly to develop and grow", and that those costs, together with possible litigation liabilities and regulatory engagement, left the company unable to generate enough cash. The company's blog speaks of legal, regulatory and operational headwinds.

A sworn statement from its investment banker, Adam Dunayer of Houlihan Capital, sets out the sale history. From August 2025 an earlier bank approached about 28 possible buyers or partners. According to that statement, they found the product and user base impressive but saw the litigation and regulatory overhang as too great. That round produced one proposal, which was not judged workable.

CNBC reports that Kentucky sued the company in January. On 14 October a group of state attorneys general, including Colorado, Oregon and Tennessee, filed a notice reserving their rights on what the filing calls the company's outstanding regulatory, safety and privacy issues.

CNBC also reports that in 2024 Google signed a non-exclusive licence for Character.AI's language model technology and rehired its co-founders, Noam Shazeer and Daniel De Freitas, in a deal that also gave the startup more funding.

## What Chapter 11 means here

Chapter 11 is usually called "reorganisation" bankruptcy. The company stays in control of its business as a "debtor in possession", keeps operating, and usually proposes a plan to pay creditors over time under court supervision.

Character.AI is using Chapter 11 mainly to sell its assets, not to restructure itself. The filings rely on section 363 of the Bankruptcy Code, which lets a court approve a sale of company assets "free and clear" of most claims against them. For a buyer, that means it can take over the assets without inheriting the company's lawsuits.

These sales often start with a **stalking-horse bid**: an agreed opening offer that sets a minimum price. Other bidders can then try to beat it at an auction. Here the agreed terms include a break-up fee for the stalking horse.

## Disney's bid

Disney Worldwide Services is the stalking horse. It has agreed to pay $20 million for a set of assets the filings call the "Disney Target Assets". CNBC describes the deal as licensing some of Character.AI's intellectual property.

The banker's declaration adds detail. Character.AI signed agreements with Disney on 18 September 2026. Disney hired most of Character.AI's staff, including its chief executive, before the filing. It agreed to lend some of them back for up to five months to help run the platform safely. Disney also paid $7.5 million of the $20 million early, $2 million of it as a refundable deposit. Other bidders can bid for the Disney assets or for the rest of the company. No other bidder had been named in the documents reviewed for this story.

| | What is confirmed |
|---|---|
| Court | US Bankruptcy Court, District of Delaware, No. 26-11603 |
| Filed | 12 October 2026 |
| Opening bid | Disney, $20 million, for a defined subset of assets |
| Expected end of sale | End of November or early December 2026 |
| Platform | Running; wound down if no bid keeps it going |

## What happens to accounts, chats and characters

The company says the platform remains up, all services are available, and paid subscriptions stay active with unchanged billing for now. It says it will tell subscribers in advance if paid features change.

On data, its FAQ says user information is still protected under the existing privacy policy and that its privacy and security practices are unchanged. It has not said what a buyer would receive.

The privacy policy is the key document here. Under "Business Transfers", it says the company may disclose information in connection with a merger, a sale of company assets, a financing or an acquisition of all or part of the business. It does not mention bankruptcy by name. The policy also says that if you made a character available to other users, the company may keep that character active even after you delete your account.

## Our take

The question for users is not whether Disney ends up owning their chats. The filings describe Disney's purchase as a subset of assets, and nobody has said publicly whether that subset includes user data. The real risk is the company's own fallback: if no bidder wants to run the service, it closes. The time to act is now, not after the auction.

## What users can do now

- **Export your data.** The company says you can export it through the app or the Character.AI website. Do this before the sale closes.
- **Decide about deletion.** You can delete your account through your profile page. Public characters you created may stay live after deletion, so edit out anything personal first.
- **Use your legal rights.** Depending on where you live, the privacy policy lists rights to access, copy and delete your data, requested through the help centre or privacy@character.ai.
- **Watch the docket.** Filings in case 26-11603 will show the auction result and what any buyer is taking.

## Sources

1. [Character.ai: An Update on Character.ai (12 October 2026)](https://blog.character.ai/an-update-on-character-ai/)
2. [CourtListener: In re Character Technologies, Inc., No. 26-11603 (Bankr. D. Del.), docket](https://www.courtlistener.com/docket/74951888/character-technologies-inc/)
3. [CourtListener: Declaration of Adam Dunayer in support of the bidding procedures motion (Doc. 17, 13 October 2026)](https://storage.courtlistener.com/recap/gov.uscourts.deb.203004/gov.uscourts.deb.203004.17.0.pdf)
4. [CNBC: AI companion startup Character.ai files for Chapter 11 bankruptcy, citing costs and litigation (13 October 2026)](https://www.cnbc.com/2026/10/13/character-ai-chapter-11-disney-bid.html)
5. [Character.ai: Privacy Policy (effective 1 July 2026)](https://character.ai/privacy)
6. [United States Courts: Chapter 11 bankruptcy basics](https://www.uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics)