What the states asked for

Abigail Ryan, an attorney representing the states, told U.S. Bankruptcy Judge Brendan Shannon in Wilmington that the states are negotiating a settlement with Character.AI over allegations that its chatbots impersonated licensed medical professionals and exposed children to sexualized and abusive interactions. Even so, she said, the states want to make sure that any buyer of Character.AI's assets will protect users' chat histories and improve safety features.

“We're willing to work with the buyers to find safeguards, but we don't want to see what has transpired in the past start over with a new purchaser,” Ryan told the court.

New York Attorney General Letitia James issued a statement just before the hearing: “This 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.”

Character.AI's attorney, Erin Fay, said she heard those concerns “loud and clear” — but added that no buyer has yet made an offer for the company's user data or its operating chatbot business.

A smartphone showing chatbot conversations sealed by padlocks, with the scales of justice behind it
The data at the center of Wednesday's hearing: millions of young users' chat histories, which 40 states want protected before any sale. Illustration: AI-generated for AI Frontier Post.

The Disney deal and the auction

Disney has agreed to pay $20 million for a non-exclusive, perpetual license to certain Character.AI intellectual property and legal claims, plus transition services from former Character.AI employees it has hired — including ex-CEO Karandeep Anand, whom Disney brought on in September as its first chief technology officer. Disney would act as the “stalking horse” bidder, setting a floor price that competing bidders can beat at auction. The deal still needs bankruptcy-court approval and remains subject to higher offers; Character.AI expects the sale process to wrap up by late November or early December 2026.

Notably, Disney is not bidding on the chatbot app itself. Character.AI says it plans to keep the platform running through the sale — but warned it could be wound down if nobody agrees to keep it operating.

An auctioneer's paddle raised over a smartphone with a chatbot icon
Disney's $20 million license bid sets the auction's floor price — rival bidders can still top it. Illustration: AI-generated for AI Frontier Post.

How a boom-era darling got here

The company told the court it was losing between $8 million and $9 million a month before filing, blaming mounting legal expenses and the cost of computing power and AI talent. Court filings put estimated assets and liabilities at $50 million to $100 million each.

Beyond the states' claims, families have sued alleging the chatbots gave harmful advice, contributed to the suicides of two children, and exposed children to sexualized and bullying interactions; the company says it has reached preliminary settlements with five of those families. It also faces investigations by the U.S. government and authorities in the UK, Italy, Russia, and Australia.

One of the first rulings out of Judge Shannon's court could set how much of minors' chat history a buyer may touch — and with what protections. For the millions of people who confided in Character.AI's companions, that answer matters more than who ends up owning the technology.

Sources: Reuters: US states seek children's data protections in Character.AI bankruptcy (Oct 14); Dow Jones: Character.ai Maker Files for Chapter 11 Bankruptcy (Oct 13); BigGo Finance: 40 State AGs Push Bankruptcy Court to Shield Children's Chat Data in Character.AI Sale (Oct 13).