Judge Lets Character.AI Asset Sale Proceed Over State Objections

Oct 31, 2026
A US bankruptcy judge approved Character.AI's bidding procedures despite objections from state attorneys general who argued that the process favors Disney.

Character.AI can proceed with its asset sale process after a US bankruptcy judge overruled objections from state attorneys general, Reuters reports. Judge Brendan Shannon approved the company's bidding procedures but did not grant proposed legal protections for Disney and former Character.AI employees.

Character.AI filed for bankruptcy on October 12, blaming lawsuits, regulatory probes, high talent and computing costs and an unprofitable business model; it was losing $8 million to $9 million a month, according to Reuters. Disney submitted an initial $20 million bid for a nonexclusive license to Character.AI's chatbot technology. The company does not plan to acquire the chatbot platform, user data or chat histories.

Attorneys general representing 41 states argued that Disney gained an advantage by hiring 66 of Character.AI's 86 employees before the bankruptcy filing. Disney expects to pay those employees $180 million over three years.

Character.AI plans to return to court on November 30 to seek approval for asset sales. Shannon also said he would likely appoint a privacy ombudsman to address concerns about sensitive user data.

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