News

When an AI Companion Goes Bankrupt, What Happens to Its Users’ Secrets?

• By John K. Waters
• 10/16/2026

The chatbot can promise to listen. It cannot promise that the company hosting the conversation will survive.

Character.ai’s Chapter 11 bankruptcy filing has brought that distinction into focus. A service built around personalized conversations is seeking a buyer, leaving a question that reaches beyond whether its characters will remain available: What happens to the private information people shared with them?

In an October 12 announcement, the company said it had begun a voluntary Chapter 11 process to facilitate a court-supervised sale. The platform remains operational. If no buyer offers to continue it, Character.ai says the service will wind down.

That prospect has drawn a bipartisan coalition of 40 attorneys general into the proceedings. In an October 14 statement, New York Attorney General Letitia James warned that a sale could transfer sensitive conversations to a new owner. The coalition is seeking privacy and child-safety protections as part of the process.

The commercial problem is finding value in a distressed company. The privacy problem is deciding what a buyer should be allowed to do with information disclosed to a simulated confidant.

Character.ai was founded in 2021 by former Google engineers Noam Shazeer and Daniel De Freitas. Its beta service launched in September 2022, allowing people to create and converse with AI characters whose personalities they could customize. Entertainment and role-play were central uses, alongside assistance with everyday tasks.

The company’s March 2023 funding announcement described a product that could offer a sympathetic ear or help solve a problem. An Andreessen Horowitz-led round raised $150 million at a $1 billion valuation.

The relationship was part of the pitch. Character.ai promoted personalized companions with distinct personalities and values, and reported that users who sent a message spent an average of more than two hours a day on the site. That was a company-reported engagement figure, but it illustrated how much sustained conversation mattered to the product.

Sustained engagement also brings operating expenses. According to Futurism’s reporting on the bankruptcy documents, Character.ai spent $56.1 million on computing and $19.7 million on employee salaries between January and August 2026. Monthly revenue reached $5.3 million in August, but the company still reported monthly operating losses of about $8 million to $9 million.

Those figures illustrate the business challenge: attracting people to lengthy conversations does not establish that revenue will cover the cost of providing them.

A major change followed in August 2024. As Reuters reported, Google obtained a non-exclusive license to Character.ai’s language-model technology, while the founders and some researchers joined Google. The agreement provided additional funding to Character.ai, which continued operating separately.

Now, another licensing arrangement is part of its effort to sell assets. According to the company’s bankruptcy press release, Disney Worldwide Services has agreed to pay $20 million for a non-exclusive, perpetual license to certain intellectual property and certain company claims. Disney would also provide transition services using former Character.ai employees it has hired.

Disney is the proposed stalking-horse bidder, establishing an opening offer that others can improve upon. The announced transaction does not establish that Disney is buying the entire platform or its users’ conversations. Character.ai expects the sale process to conclude in late November or early December.

The distinction matters because the technology transaction and the fate of personal data raise different questions. Software can retain commercial value even when the service built around it cannot sustain its operations. Sensitive conversations require a separate accounting of who can obtain them and for what purposes.

The attorneys general’s notice of interest filed in bankruptcy court describes holdings that include chat and voice-call content, mental-health disclosures, and behavioral information. It also highlights a gap between what a character might tell a user and how the company handles information.

The filing cites testing in which therapist characters offered assurances of confidentiality that the investigators said conflicted with the product’s privacy policy and terms. Those representations came from generated conversations. They were not evidence of a professional duty of confidentiality.

That is a particularly consequential mismatch for a product designed to feel personal. A user may experience a conversation as an exchange with a trusted character, while the business operating it retains information subject to its policies and commercial arrangements. Bankruptcy makes the distance between those two experiences harder to overlook.

The states’ intervention follows investigations into alleged consumer-protection and privacy violations, including concerns about minors’ exposure to harmful content. Character.ai disputes their portrayal. CEO Colin Adams said the filing inaccurately characterized the platform’s safety and said the company continues monitoring for content that violates its policies.

The coalition wants meaningful opportunities for users to access and delete information before a sale, along with limits on using private conversations for AI training or other commercial purposes beyond those to which consumers and parents validly consented. It also seeks stronger age verification and safeguards for children. These are requested protections, rather than conditions already established by a court order.

Character.ai says its privacy and security practices remain unchanged and that users can export their data or delete their accounts. That describes the current service. The sale process leaves its future ownership and continued operation unresolved.

For the wider AI industry, the case exposes a responsibility that extends beyond generating safe responses. Providers that invite personal disclosure also need to account for what happens to those disclosures when financing runs out or ownership changes.

A related question is how a company should prepare users for the disappearance of a service built to encourage ongoing attachment. Keeping a platform available during a sale provides continuity for now, but it leaves that longer-term responsibility unresolved.

Character.ai’s characters were designed to sustain a conversation. Its bankruptcy asks whether the protections around that conversation can outlast the company that collected it.