A bankruptcy judge let Disney’s $20 million Character.AI bid move ahead Friday. He also pushed the chatbot company to bring in an outside privacy expert to protect kids’ data.
Disney’s $20 million bid for a slice of Character.AI cleared a big hurdle on Friday, Oct. 30. It also picked up a warning label.
At a hearing in U.S. Bankruptcy Court in Wilmington, Delaware, Judge Brendan Shannon approved the rules for selling off Character.AI’s assets. That locks in Disney’s offer as the opening bid.
But he also said he would “strongly encourage” the company to hire a privacy ombudsman, Bloomberg reported. That’s an outside expert who checks how user data gets handled.
The worry is kids. Character.AI lets people chat with AI-made characters by text and voice, and minors have used it. Several states have investigated or sued the company over how the bots talked to minors.
What did the judge actually decide about Disney’s bid?
He gave the auction a green light. Disney Worldwide Services is the “stalking horse,” which is bankruptcy talk for the first bidder that sets the floor price. If nobody beats it, Disney wins by default.
The judge stopped short of ordering a privacy ombudsman. He encouraged one instead, per Bloomberg, Law360 and Briefs Finance. He also overruled the states’ objections to the bidding rules for now, while leaving room for them to fight again at the final sale hearing.
He didn’t sign off yet on the legal protections Disney asked for. Those include shields for Disney and for the former Character.AI workers it hired. That fight comes later.
Is Disney buying Character.AI?
No. Disney’s $20 million buys a non-exclusive license to some of Character.AI’s technology and intellectual property. It doesn’t buy the app, the company or its users.
In a revised sale notice filed Oct. 30, the company said personal user data is left out of what Disney gets, according to PPC Land’s read of the court filing. Character.AI argued that means a privacy review of the Disney deal isn’t needed.
The states and the federal bankruptcy watchdog, the U.S. Trustee, see a risk anyway. Their concern is what happens to millions of chat logs if other buyers come for the rest of the company.
Here’s the timeline from the sale notice, per PPC Land:
Objections to the sale are due Friday, Nov. 13.
Rival bids are due Friday, Nov. 20.
An auction is set for Monday, Nov. 23, if anyone else bids.
The sale hearing is set for Tuesday, Nov. 24.
Disney’s deal has to close by Dec. 17 under its terms.
Why are dozens of states fighting this?
Attorneys general from 39 states and Washington, D.C., signed on to objections, court filings show. Their complaints go past privacy.
The states say Disney got an unfair head start. Before the bankruptcy filing, Disney hired 66 of Character.AI’s 86 employees.
WDWNT reported Disney expects to spend about $180 million over three years on pay and retention for that group. That works out to roughly $60 million a year.
Disney also paid $7.5 million up front in September, and $5.5 million of it can’t be refunded, PPC Land reported. Any rival has to top Disney by a real amount. The minimum overbid is $21.7 million, and Disney gets a $700,000 breakup fee if it loses.
Disney hasn’t commented publicly on Friday’s hearing.
How did Disney end up in this deal?
In September 2025, Disney sent Character.AI a cease-and-desist letter over bots using its characters without permission. A year later, Disney hired former Character.AI CEO Karandeep Anand as its chief technology officer.
Then on Oct. 12, 2026, Character Technologies filed for Chapter 11 in Delaware with Disney’s bid already lined up. So the company that once told Character.AI to stop using its characters is now first in line for its tech.
Florida, Kentucky, Texas, Pennsylvania and New Mexico are among the states that have looked into or sued the platform.
What happens to Character.AI users now?
For now, the app stays up while the case plays out. The company’s banker testified that buyers have shown interest in the platform and other pieces Disney doesn’t want, according to Rallies, which covered the hearing.
That’s exactly where a privacy ombudsman would matter. Under federal bankruptcy law, that expert reports to the court on what a sale would mean for customers’ privacy and how to limit any harm.
If you’re a parent whose kid used Character.AI, the next date to watch is Nov. 24. That’s when the judge is set to decide whether the sale goes through, and when the states get another shot at their arguments.
Article compiled and written by Kambrea Pratt (editor-in-chief), Derek Gibbs (beat editor) and the Pirates & Princesses newsroom. Pirates & Princesses is part of WebReef Media.
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Hat Tips:
WDWNT (Oct. 31), the hearing report and staffing figures
Bloomberg (Oct. 30), the judge’s privacy ombudsman comments
Law360 (Oct. 30), the bidding procedures ruling
PPC Land, the sale notice, bid terms and filing timeline
Briefs Finance (Oct. 30), the states’ objections at the hearing
Rallies (Oct. 30), the banker’s testimony
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