Asked by forty attorneys general whether twelve million people’s conversations can change hands in bankruptcy, the company gave the answer the whole category would give. Yes. You agreed to it when you signed up. The sentence is true, and it is the clearest statement yet of what a companion app’s promise of intimacy was actually worth.
Two days before the hearing on how it would be sold, Character.AI filed its reply to the states. It kept the 21.7 million dollar minimum for anyone who wants to outbid Disney. It kept the 700,000 dollar break-up fee, on the argument that Disney’s hiring of its staff and free transition services save the estate more than five million. It rejected a sixty-day challenge period, rejected a longer calendar, and rejected the idea that claims against former employees should be sold separately. On the one question that reaches the people who used the product, it said this: the company’s privacy policy already permits the transfer of user data, and it would consent to a consumer privacy ombudsman “under appropriate circumstances.”
Eight more states joined the objection the next day, bringing the coalition to 39 and the District of Columbia. Their filing calls the Disney bid “nothing more than a veiled attempt to buy releases,” and notes that Disney keeps what it came for, the chief executive, 66 of 86 employees, and a release from any winning bidder that wants the transition services, whether or not it wins the auction. The judge rules at the end of October 2026. Bids are due in late November. If no one bids for the platform, it is wound down.
What the policy says, and what the users heard
The company’s position is not wrong as a matter of contract. Almost every consumer privacy policy contains a clause allowing data to transfer in a merger, acquisition, or bankruptcy, and Character.AI’s does too. Anyone who created an account agreed to it. That is what a privacy policy is for: to make the thing the company might someday do legal in advance.
What the clause does not capture is what the data is. For a social network, “user data” means posts, likes, and a graph. For a companion app, it means two years of one person’s side of a relationship: what they told a character at two in the morning, what they were ashamed of, who they were angry at, what they wanted and could not say to anyone with a face. The company’s own marketing promised that the character was someone who understood. Its privacy policy, read in a Delaware courtroom, says that someone’s memory of you is a transferable asset, and that you consented.
Both statements were always true at once. The industry just never had to say the second one out loud while the first was still on the landing page.
The concessions, and what they reveal
The reply lists what the company already does: age assurance, a block on open-ended chat for users under eighteen, crisis tools. It offers opt-outs from advertising and from training on your conversations, but only “where required by law,” and for training only in the United Kingdom and the European Union. An American adult who talked to a character for two years has no right under the company’s own terms to keep those conversations out of a model, and the company, in its reply to forty states, declined to extend one.
That is the detail that explains the states’ objection better than the break-up fee does. The Michigan attorney general put it in one line earlier in the month: voluntary safety measures are not enough if they can be reversed by the next owner. The company’s reply confirms the worry from the other direction. It describes everything it does for users as policy, and policy transfers with the estate. A buyer who wanted the twelve million users without the age checks would be buying something the current owner has just described as optional.
Who is actually at the hearing
Look at who is in the room when the terms of twelve million relationships are decided. The debtor, arguing to keep the process tight. Disney, which does not want the conversations and is not bidding for them. Thirty-nine states, arguing about fees and deadlines and, in a reserved paragraph, about an ombudsman. The United States Trustee. A joinder from Florida.
Not in the room: anyone who used the product. The states asked that notice of the sale be posted on the platform itself, where the people with the most at stake might see it, and the company’s reply says it will “propose a revised sale notice.” The users’ interest is being represented, to the extent it is, by state governments arguing procedural points, because the users themselves have no standing in a bankruptcy they are the assets of.
This is the structural fact under every companion app, and it took a Chapter 11 to make it visible. The user is not a party to the relationship in any sense a court recognizes. The character they talked to is intellectual property. The conversation is data. The relationship is a privacy-policy clause. The moment the company fails, the person who did two years of talking discovers that they were, legally, the inventory.
What a relationship would have required
There is a version of this that could not happen, and it is worth stating precisely rather than as a slogan. If the counterpart is a real person, the conversation is between two people and belongs to both of them, the way any conversation does. There is no model to train on it, because the someone is not a model. There is no estate it could sit in, because a person’s memory of you is not a corporate asset. The privacy policy still exists, as it must, but what it protects is a relationship rather than an inventory, and it says so.
The companion category built the opposite and called it the same thing. It sold “someone who understands you” and stored “user data.” Those were never the same object, and the company’s reply to the states is the first document in which a company has been forced to say which one it was holding. You cannot be honest with something that sells your secrets, and it turns out you also cannot be honest with something whose terms of service were always going to let your secrets be sold with the furniture.
The company is right that users agreed. The question the hearing will not answer is what, exactly, they thought they were agreeing to, and whether anything built on a two-year relationship has the right to be surprised when the answer turns out to be everything.
Sources: In re Character Technologies, Inc., U.S. Bankruptcy Court for the District of Delaware, Case 26-11603 (BLS): debtor’s omnibus reply and revised proposed bidding procedures order (Docket No. 73, October 27, 2026) and joinder of eight states (Docket No. 79, October 28, 2026), as reported by PPC Land (October 28, 2026). Objection of 31 states and the District of Columbia (Docket No. 66, October 23, 2026). Office of the Michigan Attorney General, press release (October 15, 2026; Dana Nessel quote). Decrypt and TechCrunch (October 13, 2026; Disney bid terms, excluded assets).
