A US bankruptcy judge ruled on Friday, October 30, 2026, that Character.AI can move ahead with the sale of its assets, overruling objections from attorneys general for 41 states who argued the process unfairly favors Disney. Why it matters: the ruling keeps a fast sale on track — the company returns to court on November 30 — but it does not settle the states’ deeper fights over Disney’s legal protections or what happens to children’s chat records.
October 30, 2026 — Character.AI’s bankruptcy sale is going forward, and Disney remains the bidder to beat.
What did the judge decide?
US Bankruptcy Judge Brendan Shannon approved Character.AI’s bidding procedures at a hearing in Wilmington, Delaware, saying the company needs to move quickly to find buyers before its financial condition deteriorates, Reuters reported. Character.AI filed for bankruptcy on October 12 with Disney as the initial bidder, offering $20 million for a non-exclusive license to its chatbot technology. Disney does not plan to buy the chatbot platform itself or user data, including chat history.
Why did 41 states object?
The state attorneys general argued Disney stacked the deck before the bankruptcy: it hired most of Character.AI’s employees — 66 of 86, including its ex-CEO — and negotiated legal releases that would shield Disney and those employees from being sued over the company’s conduct. A parent who sued Character.AI over alleged harmful interactions their child had with its chatbot also objected, as did the US Department of Justice’s bankruptcy watchdog. Shannon said the legal protections for Disney and the employees could still be challenged later, separately from the asset sales, and he did not approve the releases at Friday’s hearing.
How did Character.AI get here?
The company blamed lawsuits, regulatory probes, high costs for AI talent and computing power, and an unprofitable business model. Without further investor backing, it was losing $8 million to $9 million a month as employee and computing costs far outweighed revenue from advertising and user fees. Disney expects to pay the 66 hired employees $180 million over the next three years — a figure that dwarfs its $20 million license bid. Character.AI’s investment banker, Houlihan Capital, testified that other buyers are showing interest, including in the platform and assets Disney does not want.
What happens next?
Character.AI expects to return to court on November 30 to seek approval of asset sales. On the question of children’s chat records, which states raised as a concern, Shannon said he would likely appoint a privacy ombudsman to address sensitive-data issues during the bankruptcy. The case is Character Technologies Inc., US Bankruptcy Court for the District of Delaware, No. 26-11603.
Why it matters
This is the endgame of one of consumer AI’s biggest names playing out in court rather than in an acquisition headline. If you or your kids have chat history on Character.AI, the ruling that matters most is still ahead: who ends up owning which assets, and what protections the privacy ombudsman puts around sensitive data. Everything AI, tested — we will be watching the November 30 hearing, because that is where the sale, and the data question, actually get decided.
Frequently asked questions
Is Disney buying Character.AI?
No. Disney set an initial bid of $20 million for a non-exclusive license to Character.AI’s chatbot technology. It does not plan to buy the platform or user data, including chat history.
Why did the states oppose the sale process?
Attorneys general for 41 states argued the process unfairly favors Disney, which hired 66 of Character.AI’s 86 employees before the bankruptcy and negotiated legal releases for itself and those employees.
Did the judge approve Disney’s legal protections?
No. Judge Shannon approved the bidding procedures but did not approve the releases; he said they can be challenged later, separately from the asset sales.
When will the sale be decided?
Character.AI expects to return to court on November 30, 2026, to seek approval of asset sales.
Sources: Reuters