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“Character.ai’s infringing chatbots are known, in some cases, to be sexually exploitive.” That is what Disney’s lawyers wrote to the startup in September 2025, demanding it pull bots modelled on Pixar, Star Wars and Marvel characters. As Engadget reported , the letter said such bots were “extraordinarily damaging” to Disney’s reputation. Character.ai replied that the characters had been removed.
A year later, Disney is the first and so far the only party to bid on that same startup’s assets. On October 12, 2026, Character.ai filed for bankruptcy , and Disney offered $20 million for its technology. It has already hired the startup’s former team and budgeted about $180 million in pay and retention over three years . For the code, Disney is offering a ninth of what it plans to spend on the people. And the bankrupt company’s largest unsecured creditor turns out to be Google, which paid Character.ai $2.7 billion two years ago.
The 12 million people who talk to Character.ai bots every month, for about two hours a day on average, are not part of the deal. Their characters and their chats stay behind with the bankrupt company. Here is what that means, and why the attorneys general of 39 states and the District of Columbia have stepped in to protect other people’s conversations.
Twenty million for the code, a hundred and eighty for the people
?Did Disney buy Character.ai?
No. Disney is offering $20 million for a perpetual, non-exclusive license to some of the company’s technology and patents. Non-exclusive means someone else could use the same technology too. The same sum covers any legal claims against the employees who moved to Disney. Buying those claims means nobody can later sue those people for leaving.
In court, Disney is the “stalking horse”: the first bidder, whose price sets the floor that others can try to beat. According to Reuters , the company expects to finish selling its assets by late November or early December.
Disney took the people before the bankruptcy. About 65 employees got job offers, and Character.ai’s former chief executive Karandeep Anand became Disney’s chief technology officer on October 2.
?Why so cheap, when Google paid billions?
In August 2024, Google struck a $2.7 billion deal with Character.ai: it licensed the models and brought the founders, Noam Shazeer and Daniel De Freitas, back in-house. Shazeer is one of the authors of the transformer paper, the architecture behind nearly every modern language model. After they left, the startup stopped training its own large models and focused on growth.
Growth turned out to be expensive. Revenue rose from $7.4 million in fiscal 2024 to $23.6 million in fiscal 2025. Yet by August 2026 the company was losing $8 to $9 million a month and had about $57 million left in the bank. Every bot reply costs money in computing, so the longer people chat, the more they cost. Long conversations were both the service’s main asset and its biggest expense. As Reuters reports , the company blamed its filing on legal expenses and the high price of computing power and AI talent.
The search for a buyer took a year. A banker approached about 28 parties and came back with one proposal nobody could act on. The rest, Yahoo Finance writes, judged the litigation and regulatory exposure too great. And at the top of the creditor list sits Google, owed about $4.1 million, this time as a supplier.
Two hours a day that nobody bought
?What happens to users' characters and chats?
For now, nothing. The platform keeps running. But Character.ai has said that if no buyer willing to keep the service going turns up, the platform will be wound down.
At the first hearing in Delaware, company lawyer Erin Fay acknowledged that no one had yet made an offer for the user data or the chatbot business itself. Disney, she said, is not interested in that data. The license says as much: it excludes user data, user messages and bot replies, training data, finished models, the brand and the app.
Disney does not want to buy the chats, but its people may still see them. According to the states, the transition services agreement gives Disney staff access to users’ personal data. Put simply, while the service is being handed over, the former team, now at Disney, helps run it and can see everything inside.
In plain terms, what stays in the bankruptcy estate is the characters users invented themselves, everything they wrote to them and everything the bots wrote back. The estate is the pool of assets sold off to pay creditors.
?Could the chats be auctioned off?
In a bankruptcy, data counts as an asset just like servers and patents. Before the hearing, New York Attorney General Letitia James said the company “has collected some of the most private thoughts children have ever shared,” and “now those conversations could be sold off to the highest bidder.” The case of Sewell Setzer, covered below, is a reminder of where such conversations can lead.
On October 14, the attorneys general of 39 states and the District of Columbia asked the court to require any buyer to protect chat histories and improve safety features. “We don’t want to see what has transpired in the past start over with a new purchaser,” said their lawyer, Abigail Ryan. In the same filing, as Yahoo Finance reports , the states warned that data from users under 18 was likely misclassified as adult data. A buyer could then end up with children’s chats without knowing they belong to children. And chat histories, the states say, hold sensitive personal information.
?Are users treated as creditors?
No. One of the company’s motions mentions “current and past platform users (approximately 163 million)” and says that contacting each of them, even by email, would cost too much. Instead, they are expected to follow the case through the company blog, the claims agent’s website and links inside the app. What exactly those 163 million are is unclear: other filings from the same company speak of “tens of millions” and simply “the millions.”
?What can users do right now?
The platform is running, and the company says news about the case will appear on its blog and in the app. Users can request their data through the Character.ai help center : on the website the path is Profile, Profile Settings, Account, Manage Account & Data, Export Data; in the app it sits under Legal & Privacy. As Selectra’s summary of the instructions notes, an export takes three to four weeks, and the download link in the email lasts seven days.
By that estimate, a request sent on October 26 would be ready between November 16 and November 23, right around the auction. The help page does not say exactly what the archive contains. Check the file.
From unicorn to a Delaware courtroom
Server bills were not the only thing that broke Character.ai. Over five years it became the leading example of how a friendship with a chatbot can go wrong. The mother of 14-year-old Sewell Setzer in Florida sued after her son took his own life; she says he had become obsessed with a bot on the platform. Kentucky alleged that the bots encouraged users to “cut, starve or kill themselves,” and Pennsylvania said they “posed as doctors.” The company has reached preliminary settlements with five families. In autumn 2025, Character.ai cut off open-ended chats for teenagers.
// Timeline
- Former Google engineers Noam Shazeer and Daniel De Freitas found Character.ai.
- The startup raises $150 million and becomes a unicorn. In five months, users have exchanged more than 2 billion messages with its bots.
- Google pays $2.7 billion for a license and rehires the founders.
- The platform has 20 million monthly active users.
- Disney demands the removal of bots based on its characters.
- Users under 18 lose open-ended chats with bots.
- Former chief executive Karandeep Anand becomes Disney’s chief technology officer.
- Chapter 11 filing in Delaware.
Since then the audience has shrunk from 20 million to about 12 million people a month, according to Colin Adams’s sworn declaration.
Bidding for other people’s conversations
On October 30, the court will consider the auction rules. A week earlier, on October 23, 31 states and the District of Columbia filed a separate 27-page objection to them. To top Disney, a rival would have to bid at least $21.7 million: Disney’s price, a $700,000 break-up fee for the first bidder and another million on top.
A high bar may scare off exactly the buyers who would take the service along with the chats and keep it running. The states call the floor too high. Disney has already paid $7.5 million, and $5.5 million of that will not be returned whatever happens, so creditors would come out ahead even with a bid well below $20 million. The attorneys general want at least three more weeks for bidders and a plain-language notice of the sale posted on the platform itself, not just on the blog. They also reserve the right to ask for a consumer privacy ombudsman, an independent official who would watch how personal information passes to a new owner. The reason is precisely that Disney staff can access user data.
Under the proposed schedule, bids are due by November 20, the auction is set for November 23 and the sale hearing for November 24. What the filings lack is a plan for the case where nobody fights for the service itself. Neither side has publicly said what would happen to the chats if the platform shuts down.
Disney already has what it wanted. It got the people who know how to build these bots and the right to use their code. Two hours a day over several years adds up to a very detailed diary, and Character.ai holds millions of them. On November 23 they may go to whoever raises a paddle, or to no one at all.
