Character.AI is up for sale, and your chats could go with it

A Delaware judge holds the gavel

On Character.AI, you talk to characters. You tell them about a breakup, a bout of anxiety, the novel you're drafting, sometimes things you wouldn't tell anyone else. Since October 12, the company that holds those exchanges has been up for sale.

Character Technologies, the company behind the app, filed for Chapter 11 protection that day in Delaware (case 26-11603). Its press release announces a court-supervised sale of all or substantially all of its assets, with a closing hoped for in late November or early December. The platform keeps running in the meantime. If no buyer steps up, it shuts down.

The first declared bidder is a Disney subsidiary. For $20 million, it gets a non-exclusive, perpetual license to some of the company's intellectual property and certain claims, and in return provides transition services staffed by former Character.AI employees it has hired. That's a license on part of the company, not a takeover of the platform. The offer is a floor, and other bidders can top it. The press release says nothing about user data, either to include it or to exclude it.

What the company holds

Character.AI's privacy policy, in force since July 1, 2026, lists what it collects: identifiers, date of birth, voice recordings for people who use voice features, and the conversations with characters. That data is used, among other things, to train the company's AI models. A companion page says users can opt out of that use, and that before training, exchanges are detached from the account and stripped of directly identifying details.

The policy also acknowledges that users sometimes share sensitive information, such as race, religion or sexual orientation, and asks them not to: "please do not include any sensitive personal information in your interactions with us or the Services." A safe-deposit box with a sign asking you not to store anything valuable is still a safe-deposit box. Its contents are what's up in the air.

The case also carries more weight than a routine start-up wind-down. In January, according to The Next Web, Character.AI settled five lawsuits tied to teen mental health crises and suicides.

The watchdog the law provides, and its condition

U.S. bankruptcy law anticipated this. Section 363 governs how a bankrupt company can sell personal data. If the company had given customers a privacy policy forbidding transfers to third parties, the sale has to honor that promise. If not, the court has to appoint a consumer privacy ombudsman (section 332), hold a hearing and get the judge's approval.

So everything hinges on a prior question: what did the company promise? We went and read Character.AI's answer.

Under "Business Transfers," the policy says the company may disclose information "in connection with or during negotiations or closing of any merger, sale of company assets, financing, or acquisition of all or a portion of our business to another company." The page on U.S. state privacy laws goes further: "We may also disclose any or all of the categories of information listed above in the event of a sale or transfer of all or part of our business." Conversations are among those categories, and so is sensitive information.

A few lines earlier on that same page, Character.AI says "we do not sell personal information for monetary consideration, and Character.AI is not a data broker." The two statements fit together. The company isn't selling personal information for cash, it's selling the business that holds it.

The word "bankruptcy" appears nowhere in either text. It doesn't need to: a sale of assets supervised by a judge is still a sale of assets. Read literally, section 363 does not call for a watchdog in this case, because the promise it protects was never made. That is our reading of the statute, not a ruling. The judge, the U.S. Trustee (the Justice Department's bankruptcy watchdog) or a creditor can still raise the question.

What a watchdog changes when there is one

For a sense of what this safeguard does, there's a fresh precedent. Spirit Airlines, bankrupt in New York, put its business data up for auction: emails, internal messages, documents. According to the notice of successful bidder filed with the court on August 14, Google won at $10 million, ahead of Mercor, a start-up that supplies training data to AI labs, at $7.5 million. The contract schedule lists 100 million emails and 500 million Teams messages.

In that case, an ombudsman was appointed: Lucy Thomson. Her supplemental report of October 5 shows what the talks between Spirit, Google and her produced. The passenger databases were pulled from the sale, along with refunds, onboard purchases and wifi, so that, according to her, no data on children or teens will go to the buyer. The remaining emails must be scrubbed of identifying details by an independent vendor, Tonic.ai, and certification of that work becomes a condition of closing.

She concludes that, from a privacy standpoint, approving the sale would be appropriate for the 97 million customers concerned. The $10 million price dates from the August auction, before the lot was cut back. It isn't the final price for what's left.

A footnote that marks the edges

The same report carries, twice, a footnote that sets the limits of the exercise. The ombudsman writes that she "did not investigate or reach any conclusion" about whether the sale or the deidentification process poses risks to affected employees or third parties. Yet corporate emails, which contain employee data, stay in the sale.

Her mandate covers consumers. Spirit's employees, whose work correspondence is headed to Google, fall outside it, and she says so in writing. A museum guard watches the paintings, not the people working in the storage rooms.

The market that feeds on such lots is growing. MIT Technology Review reported on October 13 that firms specializing in winding down start-ups are now reselling their work archives to AI labs. One of them, SimpleClosure, says 47% of its deals now include code or data sales. A legal scholar quoted there, Ifeoma Ajunwa, notes that there is no federal law banning such sales.

What we don't know yet

The decisive document isn't public. According to its press release, Character.AI filed a motion on bidding procedures, the one that will say what is for sale and on what terms. When we checked the docket on October 13, it wasn't there yet: eleven filings posted by the notice agent, all about keeping operations running, from payroll to electricity bills.

So we don't know whether the conversations are in the lot, or whether the company will offer protections like Spirit's on its own.

At Spirit, it was through talks with the ombudsman that children's and teens' data came out of the sale. In the Delaware docket, no filing yet names anyone to ask the question.