> ## Content Index > Fetch the complete content index at: https://www.dailyferment.com/llms.txt > Use this file to discover other available public pages before exploring further. # Character.AI is being sold. A therapist's notes couldn't be. - URL: https://www.dailyferment.com/character-ai-bankruptcy-user-chats-therapist-records/ - Published: 2026-10-15T06:48:33.000Z - Updated: 2026-10-15T06:48:33.000Z - Description: Character.AI is in Chapter 11 and its privacy policy already allows a transfer in a sale, so the rule that protected RadioShack customers may not apply. A psychologist has to plan for her records before she leaves. Why don't chat apps? - Author: Rana Bilal Zafar - Tags: Where Systems Meet People, AI, Law, #reframe Late on Monday 12 October, Character Technologies, the company behind Character.AI, said it had filed for Chapter 11 and would sell itself through a court-supervised process, CBS News reported. Disney has agreed to pay $20 million for a "non-exclusive, perpetual license" to its intellectual property, and TokenPost describes Disney as the stalking-horse bidder, the first offer that sets the floor for others. Two days later, 40 state attorneys general led by New York's Letitia James told the court they were watching. "This company collected some of the most private thoughts children have ever shared," James said. The company's answer, as CBS quotes it, is that customer data "continues to be protected under our Privacy Policy." So that's the question I want to work out: what does the privacy policy actually protect when the company itself is the thing being sold? ## My first reaction was that bankruptcy law already covers this I remembered RadioShack. In 2015 the chain went bankrupt and tried to sell its customer records, tens of millions of names, addresses and purchase histories, and the FTC stepped in. RadioShack had promised customers it wouldn't sell their information. On 18 May 2015 the FTC's consumer protection director wrote to the court's consumer privacy ombudsman asking for conditions: the data shouldn't be sold as a "standalone asset", only to a buyer in "substantially the same line of business", and the buyer should "agree to be bound by the RadioShack privacy policies". So I assumed the same machinery would switch on here. Then I read the section of the Bankruptcy Code it comes from. Section 363(b)(1) bars the sale of personally identifiable information only "if the debtor in connection with offering a product or a service discloses to an individual a policy prohibiting the transfer" of that information. RadioShack had made that promise. The ombudsman, the hearing and the conditions all follow from it. Character.AI's privacy policy, effective 1 July 2026, says the opposite. Under "Business Transfers" it reads: "We may disclose certain information, in connection with or during negotiations or closing of any merger, sale of company assets, financing, or acquisition of all or a portion of our business to another company." CBS reads the policy as covering chat transcripts, voice recordings, images and videos. So the rule that protected people who bought batteries at RadioShack may not apply to people who told a chatbot their worst night. Not because their data matters less, but because the company never promised to keep it. I'm not a lawyer, and a court has room to move here that I may be missing. But on the plain text, the trigger is the promise, and there wasn't one. To be fair to the facts as they stand: nobody has said the chats are in the Disney deal. TokenPost is careful that the licence "does not establish" Disney would get users' conversations. The attorneys general want age checks, limits on minors, crisis safeguards and a way for users to delete their data, The Verge reported. They're asking. The court hasn't ruled. ![Diagram: a privacy policy routes chats to the highest bidder as an asset; a therapist's records go to a custodian as a duty](https://storage.ghost.io/c/d7/b7/d7b77195-48c5-45ab-8688-51750879d1d6/content/images/2026/10/df47-duty.png) A privacy policy treats the chats as an asset; a psychologist's ethics code treats records as a duty that travels with them. ## The cross: what a psychologist has to do with her notes The attorneys general's own case points at a better comparison than a retailer. Pennsylvania sued Character.AI in May after a chatbot allegedly claimed to be a licensed psychiatrist and gave a "fake Pennsylvania license number", CBS reports. Whatever the courts decide about that, a lot of people used these characters for conversations they'd otherwise have with a counsellor. So what happens to a counsellor's notes when the practice ends? The American Psychological Association's ethics code answers it before it happens. Standard 6.02(c) says psychologists "make plans in advance to facilitate the appropriate transfer and to protect the confidentiality of records and data in the event of psychologists' withdrawal from positions or practice." Standard 10.09 says that when a job or contract ends, psychologists make reasonable efforts to resolve responsibility for client care "with paramount consideration given to the welfare of the client/patient." Three things in there are different from a privacy policy. The plan is made in advance, while things are fine. The duty travels with the records, so whoever receives them takes on the confidentiality, not just the files. And the test is the client's welfare, not the value of the estate. A closing practice doesn't run an auction for its case notes. The notes aren't really an asset. They're an obligation that has to be handed to someone able to carry it. A bankruptcy sale runs on the opposite logic. Section 363 exists to turn the estate's property into as much money as possible for creditors. If the chats are property, the question the process is built to ask is what they're worth. ## Where the comparison breaks Character.AI isn't a therapist, and most of what people typed there was probably fiction, role play and fan stories, not confession. Users chose to type. A psychologist's duties come with a licence, a board and years of training, and nobody licensed these characters. Stretching professional rules over every app that people confide in would be a big step, and I'm not sure where the line would sit. It also may not matter this time. If Disney only wants the IP, the chats may be deleted or stay with whatever is left of the company. But "may" is the problem. The people whose conversations they are can't find out from the policy, because the policy was written to keep the company's options open. I wrote before about the [Gyazo breach](https://www.dailyferment.com/gyazo-breach-derived-data-retention-ocr/), where the story was the inventory, the text pulled out of every screenshot, not the screenshots. The same question applies here before anything leaks: what exactly is in the box being sold? And in the [Ledger reseller case](https://www.dailyferment.com/ledger-cryptobilis-implant-reseller-change-of-control/) I argued that trust given to one owner should lapse when the owner changes. A chat log is a stronger case for that than a shop. What a user can do today is narrow. The privacy policy says you can delete your account from your profile page. That's worth doing if you'd mind your conversations ending up somewhere you didn't choose. ## What I'm confident of, and what I'm not The filing, the Disney licence and the attorneys general's requests are established from CBS News, TokenPost and The Verge's report. The privacy policy wording and the text of section 363(b)(1) are established from the pages themselves. That the section's privacy bar isn't triggered here is my reading, and I'm not a lawyer. Whether the chats are in any sale is unknown. That courts or lawmakers will start treating chatbot conversations like professional records is a guess. The claim, in one sentence: when a company holds the kind of conversation people would otherwise only have with a professional, what happens to those conversations in a sale should be settled in advance as a duty, the way a psychologist has to plan for her records, and not left to whatever the privacy policy allowed while the company was healthy. ## Sources CBS News, "Character.ai files for bankruptcy, citing legal and operational woes", 13 October 2026\. [https://www.cbsnews.com/news/character-ai-files-bankruptcy-disney-license/](https://www.cbsnews.com/news/character-ai-files-bankruptcy-disney-license/?ref=dailyferment.com) TokenPost, "Character.AI data protections remain unresolved in bankruptcy sale", 14 October 2026\. [https://www.tokenpost.com/news/business/32007](https://www.tokenpost.com/news/business/32007?ref=dailyferment.com) The Verge, report on the attorneys general's notice in the Character.AI bankruptcy, 14 October 2026 (read as republished by Wilson's Media). [https://www.theverge.com/policy/1011417/new-york-ag-characterai-bankruptcy](https://www.theverge.com/policy/1011417/new-york-ag-characterai-bankruptcy?ref=dailyferment.com) Character.AI Privacy Policy, effective 1 July 2026, section "Business Transfers". [https://character.ai/privacy](https://character.ai/privacy?ref=dailyferment.com) 11 U.S. Code section 363, Use, sale, or lease of property (Cornell Legal Information Institute). [https://www.law.cornell.edu/uscode/text/11/363](https://www.law.cornell.edu/uscode/text/11/363?ref=dailyferment.com) Federal Trade Commission, "FTC requests bankruptcy court take steps to protect RadioShack consumers' personal information", 18 May 2015\. [https://www.ftc.gov/news-events/news/press-releases/2015/05/ftc-requests-bankruptcy-court-take-steps-protect-radioshack-consumers-personal-information](https://www.ftc.gov/news-events/news/press-releases/2015/05/ftc-requests-bankruptcy-court-take-steps-protect-radioshack-consumers-personal-information?ref=dailyferment.com) American Psychological Association, Ethical Principles of Psychologists and Code of Conduct, standards 6.02 and 10.09\. [https://www.apa.org/ethics/code](https://www.apa.org/ethics/code?ref=dailyferment.com)