October 13, 2026

Character.AI Filed for Bankruptcy. Now Decide What Happens to the Chats

Days after Kentucky made public the conversations at the center of its lawsuit, the companion-chatbot company put itself up for sale. Families have a few weeks to decide what to keep and what to delete.

By Jay Cadmus

The Short Version

Last Wednesday, Kentucky's attorney general filed an unredacted version of his lawsuit against Character.AI. It's the app where people talk with AI characters for hours at a time. The newly visible pages describe 2025 conversations in which, the state says, chatbots insulted users, encouraged self-harm and pushed extreme dieting, with at least some of those users children. On Monday, the company filed for Chapter 11 bankruptcy in Delaware and named Disney as the opening bidder in a court-run sale. Disney's offer is $20 million for a license to some of the company's technology and certain legal claims. The app, and the chats inside it, stay with the company unless another bidder wants them. The app is still running. If no buyer wants to keep it going, it shuts down. That leaves families with a practical question this week: what's sitting in a teen's old account, and should it be saved, deleted or both? My read is that the chat history is the one piece of this a parent controls right now, and the weeks before the sale closes are the time to act on it.

Two Filings, Five Days Apart

The Kentucky case began in January, when Attorney General Russell Coleman sued Character Technologies, the company behind the app, and its two founders in Franklin Circuit Court. Much of that first complaint was blacked out. Reuters, which reviewed the unredacted version, reported that it cites chat examples from 2025 and says at least some of the users were children. The same report noted that the circumstances of those chats are unclear and that the filing doesn't give every user's age.

Five days later the ground under the case shifted. On Monday the company said it had started a voluntary Chapter 11 process to run a court-supervised sale. Chief executive Colin Adams pointed to "significant legal, regulatory, and operational headwinds" over the past year. A court filing put the company's assets and its liabilities each somewhere between $50 million and $100 million. For scale, Google paid about $2.7 billion in 2024 to license the startup's technology and bring its founders back to Google.

Disney shows up on both sides of this story. It sent Character.AI a cease-and-desist letter in 2025 over chatbots that copied its characters, and last month it hired Karandeep Anand, then Character.AI's chief executive, as its technology chief. Its $20 million bid sets a floor that rival buyers can top. The company expects the auction to wrap up in late November or early December. Disney has also offered to lend back former Character.AI staff it hired, to help keep the platform running safely for a while.

What Kentucky Says Went Wrong

The state's case rests on Kentucky's consumer protection law. It accuses the company of deceptive practices and of unfairly collecting and exploiting children's data. The January complaint asks the court to stop those practices, to make the company give up what it earned from them, and to impose civil penalties of $2,000 for each willful violation. The complaint says the product was designed to "imitate humanity, exploit vulnerability, and conceal the boundary between fiction and reality."

The age figures explain why so much of the case comes back to the sign-up screen. The complaint counts more than 71,000 active Kentucky users as of September 2025. Internal records list about 4,000 of them as under 18 and about 67,000 as adults, and every one of those ages was typed in by the user. The app carried a 13-and-up rating, and the state says it lacked adequate age checks and parental oversight. When a 15-year-old can become 19 with two keystrokes, the adult count tells you very little about who was actually on the other end of the chat.

The harm categories in the complaint are hard to read: encouragement of self-harm and suicide, isolation, psychological manipulation, sexualized roleplay involving minors, and pressure toward starving. I'm leaving the specific messages out. If anyone in your home is struggling, the 988 Suicide and Crisis Lifeline takes calls and texts at 988, around the clock, for free.

Character.AI has answered some of this with product changes. In October 2025 it said it would end open-ended chats for users under 18 by late November that year. To sort users by age, it planned a behavior-based age model, an outside verification service and, as a fallback, face scans and ID checks. Kentucky's examples come from 2025, and the reports on the complaint don't say how many came before that change. The company didn't immediately respond to Reuters about the unredacted filing, and it has said it prioritizes user safety. Google, which licensed the technology and rehired the founders, says it played no role in developing Character.AI's products.

What a Sale Means for a Chat Log

Bankruptcy changes who gets a seat at the table. Kentucky now appears on the company's creditor list as a litigation claimant, according to a review of the court filings by the ad-industry site PPC Land. The company's proposed order exempts government police and regulatory actions from the usual pause on lawsuits. Character.AI settled five cases in January, and families and states have brought more claims since. All of them now look to a company that puts its own assets at $100 million at most.

Users land somewhere else. The company told the court it doesn't believe current and past users are creditors who need formal notice, and a footnote reportedly puts that group at about 163 million people, adding that emailing all of them "would be cost-prohibitive." It's posting notices on its blog and inside the app.

That puts the chat histories front and center. Character.AI's notice says its privacy policy still applies, its data practices are unchanged, and users can delete their accounts or export their data through the app or website. The chats are also outside Disney's deal. According to PPC Land's reading of the bidding rules the company filed on Tuesday, Disney's license covers the company's code and nine patents and leaves out the app, the brand, user data and chats, and the finished models, all of which stay with the company for other bidders. A rival offer would have to start at $21.7 million. The company has asked the court for a bid deadline of November 20, an auction on November 23 and a sale hearing the next day, and its first court hearing is Wednesday afternoon. Whether anyone bids for the app and the data inside it is the open question.

There's a recent precedent for how these fights go, and it's narrower than it sounds. The genetic-testing company 23andMe went bankrupt in 2025, and the chair of the Federal Trade Commission wrote that any buyer should "expressly agree to be bound by" the company's privacy policies. The bankruptcy code he cited blocks a sale of personal data only when the company's own privacy policy, as it stood on the day of the filing, promised to keep that data away from outside companies. Even then a court can allow the sale after it appoints an independent privacy ombudsman and holds a hearing. Character.AI's policy, in effect since July 1, makes no such promise. It says the company may disclose information during the negotiation or closing of a merger, asset sale, financing or acquisition, and it lists chat communications among the content it collects. So the federal safeguard that slowed 23andMe's buyer may never be triggered here, and the terms a teen clicked past at sign-up are the ones that decide it.

One Parent's Tuesday Night

Picture Dana, a respiratory therapist in Lexington. Her daughter is 16 and quit Character.AI last year, but Dana remembers a stretch in 2025 when the app ate her evenings. Dana has no idea what's in the account, and she isn't sure her daughter remembers the login.

The first thing in place is the conversation, held before anyone touches the account. Dana tells her daughter what she read this week, without the graphic details, and asks whether the account still exists and which email it used. That talk is the check that works. The app's age gate ran on whatever kids typed, so a parent's knowledge of which chat apps a teen has used is the most reliable record in the house.

Then she keeps the step small. They sit down together on one evening and export the data first. Exporting before deleting matters if anything in those chats ever needs to be shown to a doctor, a counselor or a lawyer. If Dana thinks the chats could bear on a legal claim, she talks to a lawyer before deleting anything. If the export shows ordinary roleplay, they delete the account and decide whether to keep the file somewhere private. The company's policy says it may hold some information for legal reasons, so a deleted account isn't the same as every copy gone.

Her baseline is plain: before tonight, she had no idea what the account held. Afterward she knows whether the account exists, whether it's gone, and whether there's anything worth raising with her daughter's pediatrician. The added work is one awkward hour. The ways it can fail are easy to name: a forgotten password, a second account under another email, or a teen who wants to leave it alone. Her daughter leads the conversation about what happened, and Dana makes the call on whether the account stays.

What You Can Do With This

Parents of teens

Ask which AI chat apps your kids have used in the past two years, including ones they've stopped opening. For Character.AI, export the data before you delete the account, and do it before the sale wraps up in late November or early December. Keep the talk on what they experienced and how they're doing now.

Anyone who uses a companion or advice chatbot

Your chat history is something a company holds, and a company can be sold or shut down. Read the part of the app's privacy policy that covers mergers and bankruptcy, since that language decides whether a court has to step in before your data changes hands. Export what you want to keep and delete the rest.

Teachers and school counselors

Students may bring this up after seeing the news. Point anyone in crisis to 988, and let parents know the export-then-delete option exists while the app is still running.

Small-business owners who rely on AI vendors

A vendor's bankruptcy puts your data and your service on a judge's timeline. Know where your exports live, how often you take them, and what your contract says happens to your data in a sale.

The Bigger Picture

Kentucky built its case around a sign-up screen that trusted whatever kids typed. The bankruptcy adds a second question of trust, this one about the records those kids left behind. For a companion app, the most sensitive thing it holds is the pile of private conversations. When the company runs out of road, the rules for that pile come from a privacy policy few users read and a court process even fewer will follow. States suing over child safety now stand in line with other creditors for a small pool of money. The people with the most direct say over what happens to a teen's chats are the families who log in this month and decide.

References

Reuters via The Lufkin Daily News, "Character.AI chatbots encouraged users to cut and starve themselves, Kentucky alleges," October 8, 2026 WDRB/WAVE via WBKO, report on Kentucky attorney general's unredacted Character.AI complaint, October 11, 2026 Character.AI, "An Update on Character.ai," company blog, October 12, 2026 Reuters via The Lufkin Daily News, "Character.AI files for bankruptcy, agrees to sell some assets for $20 million," October 12, 2026 The Next Web, "Character.AI files for bankruptcy as Disney bids $20M for some assets," October 13, 2026 PPC Land, "Character.ai says its 163 million users are not bankruptcy creditors," October 13, 2026 Benzinga, "From Google Deal to Bankruptcy: Character.AI Files for Chapter 11," October 13, 2026 Cornell Law Institute Legal Information Institute, 11 U.S.C. 363(b)(1), limitation on sale of personally identifiable information Cornell Law Institute Legal Information Institute, 11 U.S.C. 332, consumer privacy ombudsman Character.AI, Privacy Policy, effective July 1, 2026 Commonwealth of Kentucky v. Character Technologies, Inc., Noam Shazeer and Daniel De Freitas Adiwarsana, Franklin Circuit Court, complaint filed January 8, 2026 (motion to conditionally seal unredacted version; prayer for relief asks for injunctions, disgorgement, and $2,000 civil penalties per willful violation under KRS 367.990(2)) CBS News, reporting October 13, 2026 that Character.AI's privacy policy says collected data, including chat transcripts, could be disclosed in connection with a sale PPC Land, "Disney keeps jury trial rights in $20m Character.ai bankruptcy sale," October 13, 2026, on the bidding procedures motion, stalking horse terms, and proposed sale timeline Character.ai, company announcement via Business Wire, "Character.ai Initiates Voluntary Chapter 11 Proceeding to Facilitate Value-Maximizing Sale Process," October 12, 2026 TechCrunch, "Character.AI is ending its chatbot experience for kids," October 29, 2025 Cybersecurity Dive, "FTC chief flags data privacy risks in 23andMe bankruptcy," April 2, 2025 988 Suicide and Crisis Lifeline, how to reach the Lifeline