An AI Chatbot Company Is Going Bankrupt. What Happens to Millions of Users' Conversations?

Character.AI's users are now wondering who might end up holding their chat history. The AI companion company filed for Chapter 11 bankruptcy late on October 12, and a group of 40 state attorneys general urged a Delaware bankruptcy judge the following day to keep young users' data safe. New York Attorney General Letitia James put the concern bluntly: "This company has collected some of the most private thoughts children have ever shared, and now those conversations could be sold off to the highest bidder."

It helps to separate what is confirmed from what is not. The company has agreed to a $20 million deal with Disney, but Disney is the opening "stalking horse" bidder for a nonexclusive, perpetual license to some intellectual property, and other bidders can top it. Key points from the reporting:

• Character.AI's attorney said no buyer has yet made an offer for its user data or its operating chatbot business
• The company's privacy policy says chat transcripts, voice recordings, images and videos could be disclosed in connection with a sale of the company or its assets
• Whether user data transfers in the Disney deal has not been publicly detailed, per one analysis of the filings

The sale is expected to close in late November or early December, and the platform would be wound down if no buyer agrees to keep it running. The company blamed legal costs and the price of computing power and AI talent, saying it was losing $8 million to $9 million a month before filing.

In the meantime, Character.AI says the service and paid subscriptions continue and that users can delete their accounts or export their data through the app or website.

This case is likely to set a reference point for a wider problem: AI companions hold unusually personal conversations, and when a company fails, the most sensitive thing it owns may be the data it collected, which is why the court's treatment of it will matter well beyond this one company.