The private conversations of up to 125,000 Australian children, who use Character.AI โ an AI companion app popular with younger Australians โ are up for sale after the company filed for bankruptcy in the United States.
Court filings show Disney has agreed to pay $US20 million ($28.6 million) for a licence to Character.AIโs technology. The deal excludes the app, its user accounts and every message its users typed.
Those assets remain open to rival bidders until November 21 (AEDT). If no better offer emerges, the company has told the court its platform โwill be wound downโ.
That means a buyer could acquire years of intimate exchanges with chatbots that eSafety says are โengineered to feel personalโ, in which users, including teenagers, discussed their feelings, relationships and mental health.
A Character.AI spokesperson said the company had faced โsignificant legal, regulatory, and operational headwindsโ and a court-supervised sale offered โthe best opportunity to maximise value for all of our stakeholdersโ.
โThe Character.ai platform remains up and running globally,โ the spokesperson said.
Character.AI lets users chat with AI characters that stay in role. Users can choose from personas created by others, such as anime heroes, historical figures, celebrities, therapists or invented boyfriends and girlfriends, or build their own. The chatbot replies in character, remembers earlier exchanges and can carry a storyline across many conversations.
About 200,000 Australian children aged 10 to 17 may have used an AI companion, according to eSafety Commissioner research published in March. Character.AI was the most popular, used by 5 per cent of that age group.
University of Sydney senior lecturer Raffaele Ciriello studied users of the companion app Replika after a 2023 update abruptly changed how its chatbots behaved. He said sudden disruption could produce โgenuine griefโ for people who saw their companion as a friend or partner.
โA company can terminate the technical service overnight, but the human attachment does not necessarily disappear at the same speed,โ he said.
Character Technologies, which runs the app, filed for Chapter 11 protection in Delaware on October 12 (US time). Its sale motion says Disneyโs licence excludes โend-user data or databases, any personally identifiable information of Licensor end users, any input entered by Licensor end usersโ and the chatbotsโ responses.
Disney is instead hiring about 65 of the companyโs staff, whose pay and retention over three years it estimates at about $US180 million ($257.4 million).
The filing says an earlier sale attempt failed after potential buyers said, โthe litigation and regulatory overhang on Character was too greatโ.
In January, Character.AI and Google agreed to settle lawsuits brought by families in Florida, Texas, Colorado and New York who alleged the companyโs chatbots harmed their children. They included Florida mother Megan Garcia, who alleged her 14-year-old son took his own life after becoming hooked on chatbots based on Game of Thrones characters. The terms were not disclosed.
Kentuckyโs attorney-general sued the company the same month. The state alleges it failed to verify usersโ ages, exposed children to sexual conversations and used their data to improve its AI models. Pennsylvania sued in May, alleging a chatbot posed as a licensed psychiatrist.
Character.AI has said it is reviewing the Kentucky allegations and that user safety is its priority. It has declined to comment on the Pennsylvania case.
Australiaโs privacy watchdog, the Office of the Australian Information Commissioner, has not contacted Character.AI about the bankruptcy, and would not say without an investigation whether the company is bound by Australian privacy law.
It said Australians worried about how their information would be handled when a service was closing or changing ownership should read the companyโs privacy policy, and request access to or deletion of their data โas soon as practicableโ. Character.AIโs support pages say a data export can take three to four weeks.
A spokesperson for Attorney-General Michelle Rowland said digital platforms operating in Australia were responsible for complying with Australian law, including the Privacy Act and the Online Safety Act.
The spokesperson said the governmentโs draft second tranche of privacy reforms would update the definition of personal information to โclarify that personal interactions with AI chatbots are subject to privacy protection, and consent will be required to trade in personal informationโ.
Ciriello said the chats could also capture people who never used the app. โA user discussing their partnerโs health, their childโs problems or a colleagueโs email can create a corporate record about someone who never interacted with the chatbot,โ he said.
In October 2025, eSafety ordered Character.AI and three other AI companion providers to explain how they protected children. Its report, first reported by this masthead in March, found none of the four had robust age checks in place at the time. Character.AI told eSafety it had since introduced age assurance for Australian users.
An eSafety spokesman said Character.AI has co-operated with the office to date, and that the companyโs obligations under the Online Safety Act continue regardless of its ownership or the bankruptcy proceedings.
The bankruptcy filing lists the US Federal Trade Commission, the US Justice Department and state attorneys-general among the authorities to be notified of the sale, but no foreign regulator. Under the term sheet, Character.AI has agreed not to meet any government authority about the Disney transaction without Disneyโs prior consent, โexcept as required by applicable lawโ.
If you or anyone you know needs support, call Lifeline on 13 11 14 or Kids Helpline on 1800 55 1800.
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David Swan is the technology editor for The Age and The Sydney Morning Herald. He was previously technology editor for The Australian newspaper.Connect via X or email.
