[BUG] Claude extension in VS Code fails to honor autoMemoryDirectory setting in settings.local.json

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

Claude VS Code extension doesn't honor the setting autoMemoryDirectory in the .claude/settings.local.json file and saves memory to a subdirectory of the user's home directory outside the repo.

The consequence is severe when using Dev Containers because rebuilding the container results in loss of memory and the inability to resume the session.

What Should Happen?

When the value autoMemoryDirectory is set in the settings.local.json file, Claude should save and use session state in the configured directory.

After a rebuild of the dev container, Claude should open the memory in the configured directory.

Error Messages/Logs

Steps to Reproduce

1. Configure the setting in autoMemoryDirectory in the file settings.local.json in the .claude subdirectory of the software repo to point to a directory in the repo, such as .claude/memory.
2. Reopen the repo in VS Code in a Dev Container.
3. Engage Claude.

3a. Look in ~/.claude and note that Claude is still writing there.
3b. Or, rebuild the container and note that the session is unrecoverable.

<img width="505" height="391" alt="Image" src="https://github.com/user-attachments/assets/55cecba5-b07f-4585-8bf8-0ee334fa6285" />

Claude Model

Opus

Is this a regression?

I don't know

Last Working Version

_No response_

Claude Code Version

2.1.34

Platform

Other

Operating System

Windows

Terminal/Shell

WSL (Windows Subsystem for Linux)

Additional Information

_No response_