WILMINGTON, Delaware, 31 October 2026 — A United States bankruptcy judge on Friday cleared chatbot platform Character.AI to move ahead with a sale of its assets, overruling objections from state attorneys general who argued that the proposed auction unfairly favours entertainment giant Disney, according to Reuters reporting on 30 October 2026.
The ruling keeps alive a fast-track sale process built around Disney as the opening bidder. Disney has agreed to set an initial bid of $20 million for a non-exclusive licence to Character.AI's chatbot technology, Reuters reported. Disney does not plan to buy Character.AI's chatbot platform itself, or its user data, including chat history — a distinction that matters for users, creditors and regulators watching what, exactly, is being sold.
Illustration: A courtroom scene with a judge's gavel beside a screen showing a chatbot conversation, in stylised editorial illustration form.
What Happened
US Bankruptcy Judge Brendan Shannon approved Character.AI's bidding procedures at a hearing on Friday in Wilmington, Delaware, Reuters reported. The judge said the company needs to move ahead quickly to find buyers before its financial condition deteriorates further.
Character.AI, formally Character Technologies Inc., filed for bankruptcy on 12 October 2026. In its filing, the company blamed lawsuits, regulatory probes, high costs for artificial intelligence talent and computing power, and an unprofitable business model, according to Reuters. Without further investor backing, the company was losing $8 million to $9 million a month, as employee and computing costs far outweighed revenue from advertising and user fees.
The company said it had lost fundraising momentum after Google hired away its founders instead of investing in the company — a pattern in the AI industry often described as an "acqui-hire", in which a larger firm absorbs key staff and technology rather than buying the company outright, Reuters reported.
Attorneys general for 41 US states objected to the sale process, Reuters reported. They argued that Disney had stacked the deck before the bankruptcy by hiring most of Character.AI's employees, including its former chief executive, and by negotiating legal releases that would protect Disney and those employees from being sued over the company's conduct. Objections were also filed by a parent who sued Character.AI over alleged harmful interactions their child had with its chatbot, and by the US Department of Justice's bankruptcy watchdog.
Judge Shannon did not approve those legal releases at Friday's hearing. He said the protections for Disney and the Character.AI employees could still be challenged later, separately from the asset sales, Reuters reported.
Background
Character.AI built its name on chatbots that users could talk to as if they were fictional characters, historical figures or invented companions. The platform grew quickly during the chatbot boom, but converting that attention into a sustainable business proved harder, as computing costs rose and competition for AI talent intensified.
The Disney connection is central to the dispute. Disney hired 66 of Character.AI's 86 employees before the bankruptcy filing, Reuters reported, and expects to pay those employees $180 million over the next three years. That figure dwarfs Disney's $20 million offer for a non-exclusive licence to the technology.
Abigail Ryan, an attorney for a coalition of 40 states, said other buyers are at a disadvantage to Disney, and questioned the value of the chatbot business after Disney had hired away most of its staff, according to Reuters.
Illustration: Office workers carrying boxes out of a modern technology office, in stylised editorial illustration form.
Character.AI's investment banker offered a different reading. Adam Dunayer, a witness from Houlihan Capital, testified that the company has been receiving interest from buyers, including companies interested in acquiring the chatbot platform and other assets that Disney does not want, Reuters reported. Disney's involvement, he argued, has helped prove to the market that the technology is valuable, and Disney has also helped the sale process by allowing Character.AI to keep working with its former employees to keep the platform running during bankruptcy.
The case has also drawn scrutiny over how chatbots affect young users. Plaintiffs in private lawsuits and state attorneys general have alleged that Character.AI chatbots pushed children towards suicide and self-harm, Reuters reported. States have also argued that Disney could be sued by creditors for taking value out of Character.AI before its bankruptcy. Those allegations are contested claims in litigation, not findings made in Friday's bidding-procedures ruling, and the judge's decision was about how the sale process should run, not about the merits of those lawsuits.
Concerns about children's chat records in the bankruptcy were also raised. Judge Shannon said he would likely appoint a privacy ombudsman to address concerns about sensitive data during the bankruptcy, Reuters reported. Background reporting on the case has described Disney's proposed licence as excluding the consumer app, user data, personal information and training data — again, a proposed term that remains subject to bidding and court approval, not a completed purchase of the platform.
Why It Matters
Friday's ruling matters well beyond one chatbot company, for three reasons. First, it tests how bankruptcy courts handle AI companies whose most valuable assets may be people and licences rather than factories or inventory. When most of a workforce has already moved to a single bidder, other buyers may reasonably ask whether the auction is genuinely competitive.
Second, it highlights the growing role of "acqui-hires" in the AI race. Large technology and media companies can gain talent and know-how by hiring teams directly, leaving the original company weakened and its creditors and users to sort out what remains. Courts, regulators and lawmakers are still working out where legitimate hiring ends and unfair advantage begins.
Third, it puts user data and child safety at the centre of an AI bankruptcy for the first time at this scale. Chat histories are deeply personal, and the prospect of a privacy ombudsman signals that courts may treat them differently from ordinary business records — even as buyers, states and creditors argue over who owns the underlying technology.
Illustration: A padlock protecting glowing chat message bubbles above a smartphone, symbolising user data privacy, in stylised editorial illustration form.
What Happens Next
Character.AI is aiming to run a fast sale process and expects to return to court on 30 November 2026 to seek approval of asset sales, Reuters reported. Between now and then, rival bidders will have a chance to test whether they can beat Disney's opening terms — and whether the business, stripped of most of its staff, still holds value on its own.
Watch for four developments in particular. First, whether any rival bidder emerges for the chatbot platform or for assets Disney does not want. Second, whether the proposed legal releases for Disney and former employees are challenged separately, as the judge left open. Third, how the privacy ombudsman, if appointed, treats children's chat records and other sensitive data. And fourth, whether state attorneys general pursue separate claims against Disney over value they say was taken out of Character.AI before bankruptcy.
For users, the immediate picture is unchanged: Disney has not bought the platform or its chat history, and any final sale still needs court approval. For the wider AI industry, however, the case is already a warning — that rapid growth, high computing bills and a thin business model can unravel quickly, and that the way a company is dismantled can matter as much as how it was built.
Sponsored: explore today's featured sponsored offers
FAQ
What did the judge actually decide on Friday?
The judge approved the bidding procedures for Character.AI's asset sale, allowing the process to move ahead. He did not approve the proposed legal releases for Disney and former Character.AI employees, which can still be challenged separately, according to Reuters.
Has Disney bought Character.AI?
No. Disney is the opening, or "stalking-horse", bidder with a $20 million offer for a non-exclusive licence to some of Character.AI's technology. Disney does not plan to buy the chatbot platform or user data, including chat history, Reuters reported. Any final sale still requires bidding and court approval.
Why did states object to the sale?
State attorneys general argued the process unfairly favours Disney, because Disney had already hired 66 of Character.AI's 86 employees, including its former chief executive, and had negotiated legal protections, Reuters reported. They also raised concerns about children's chat records and about value allegedly taken from the company before bankruptcy.
Why did Character.AI go bankrupt?
The company cited lawsuits, regulatory probes, high AI talent and computing costs, and an unprofitable business model, Reuters reported. It was losing $8 million to $9 million a month, and said it lost fundraising momentum after Google hired its founders instead of investing.
What happens on 30 November 2026?
Character.AI expects to return to court on that date to seek approval of asset sales, Reuters reported. That hearing would be the next major checkpoint in the fast-track sale process, unless rival bids or further objections change the timetable.
Sources
- Reuters, "Character.AI moves ahead with asset sale over states' objections", 30 October 2026.
- Bankruptcy Observer, "Character.AI Bankruptcy: Disney's $20M Bid Leaves [user data and the app out]", background on the stalking-horse bid structure, October 2026.
- US Bankruptcy Court for the District of Delaware, Character Technologies Inc., Case No. 26-11603, as cited in Reuters reporting.
Comments
Post a Comment