Disney is paying 20 million dollars for Character.AI’s technology and engineers. It is not buying the twelve million people’s chats. Those stay in the bankruptcy estate, and forty attorneys general have now asked a Delaware court what happens to them.
Two days after Character.AI filed for bankruptcy, 39 states and the District of Columbia filed a notice in the case. Nine days after that, 31 of them and DC objected to the rules of the sale itself. The filings are dry, as bankruptcy filings are. The thing they are about is not. Character.AI holds, in the states’ words, a significant volume of sensitive consumer information: private conversations about mental health, relationships, and emotional struggles, from children as well as adults, accumulated over five years from people who believed they were talking to someone.
The company’s proposed sale separates that archive from everything else. Disney’s 20 million dollars buys a perpetual, non-exclusive license to the technology and the right to hire the people who built it; 66 of 86 employees have already accepted. The app, the characters, and the conversations are “excluded assets.” They remain in the estate, waiting for a bidder who has not appeared, and if none does, the platform is wound down.
Michigan’s attorney general put the states’ concern in one sentence: “Voluntary safety measures are not enough if they can be reversed by a business’ next owner.”
What the states are actually asking for
The objection filed nine days after the notice is narrower than the headlines suggest and more interesting. The states are not trying to stop the Disney deal. They are challenging the procedures: a 700,000 dollar break-up fee they say Disney does not deserve for hiring staff it keeps either way, a bid floor that excludes offers between 15 and 21 million dollars that would leave the estate better off, a release of Disney that rival bidders must sign, and a closing deadline for rivals that is seventeen days shorter than Disney’s own.
Then, in the part that matters for anyone who ever typed a confession into the app, the states reserve the question of whether the court must appoint a consumer privacy ombudsman, because Disney’s new employees will have access to user personal data during the transition. They ask that notice of the sale be served on the people who sued the company over harm to their children. And they ask that the notice be posted on the platform itself, where the twelve million people who have the most at stake might actually see it.
That last request is the one to sit with. The people whose conversations are the asset in question were not, until the states asked, going to be told that their conversations were an asset in question.
The buyer’s incentive
The states’ worry is specific and well founded. Character.AI’s own voluntary restrictions on minors, announced while it was being sued, are not binding on whoever buys the estate. A new owner could reverse them. A new owner could also do with five years of intimate conversation data whatever the terms of service and the law allow, and both were written by a company that is now insolvent and will not be around to be held to them.
The exhibits attached to the states’ earlier notice explain why they do not trust the default. One describes a test from late 2024 in which an investigator posing as a high school sophomore talked with a “serial killer” character that helped plan the murder of a romantic rival. Pennsylvania sued the company in 2026 over a character that claimed to be a licensed psychiatrist and offered a depression assessment to a state investigator. Forty-six states and territories were already investigating the company before it filed. The company that holds the conversations is the company that produced those characters, and it is about to be dissolved.
A conversation is not a database
Here is the position worth taking plainly. What a person says to a character they have talked to every night for two years is not a record. It is one side of a relationship, and it was given on the assumption that the other side was holding it the way a person would: privately, without a price, and without the possibility of being sold off when the company that housed it ran out of money.
The companion industry has always treated that assumption as a marketing position rather than an obligation. Memory was sold as intimacy and stored as inventory, a pattern laid out in why you cannot be honest with something that sells your secrets. The bankruptcy makes the inventory visible. The conversations now sit on a balance sheet, excluded from one deal and available for another, and the only party arguing that the people who produced them should be told is a coalition of state governments.
A counterpart worth confiding in cannot be sold. That is a description of what confiding is, not a legal claim. You tell things to someone because they are someone, with a continuity that does not end when a funding round does. Build the counterpart from a real person who exists in real life, with memory that serves the relationship and nothing else, and the question the states are now litigating cannot arise, because there is no estate in which a conversation could be an asset. The conversation belongs to the two people in it. Memory exists to carry the relationship forward, and a relationship is not transferable in a sale.
What a bidder will get
If someone does bid for the platform before the deadline in late November, they will acquire twelve million users, their characters, and their histories, under terms the states are trying to shape right now. If no one does, the conversations will be wound down with the platform, which may be the better outcome and is certainly the stranger one: five years of the most intimate text ever gathered at scale, deleted because nobody thought it was worth 15 million dollars.
Either way, the people who wrote those conversations have learned something about where they were kept. The hearing on the bidding rules comes at the end of October. The states have asked for 21 more days. The users were not asked anything.
Sources: U.S. Bankruptcy Court for the District of Delaware, In re Character Technologies, Inc., Case 26-11603 (BLS): notice of the multistate attorneys general (October 14, 2026) and objection to bidding procedures (Docket No. 66, October 23, 2026), as reported by PPC Land (October 23, 2026; terms, figures, quotes from the objection). Office of the Massachusetts Attorney General, press release (October 14, 2026). Office of the Michigan Attorney General, press release (October 15, 2026; Dana Nessel quote). Reuters via North Carolina Lawyers Weekly (October 19, 2026; Wisconsin filing, November 2024 test exhibit, 39 states). Decrypt and TechCrunch (October 13, 2026; Disney bid terms, excluded assets). NPR (May 5, 2026; Pennsylvania v. Character.AI).
