State attorneys general push to protect Character.AI user data in bankruptcy

In short: A group of 40 state attorneys general says Character.AI’s bankruptcy should not put users’ private chatbot chats at risk during any sale or transfer of its assets.

What happened

New York Attorney General Letitia James says her office has been part of a multi-state investigation into Character.AI for years. This came to light as the company entered bankruptcy.

James is part of a group of 40 attorneys general from both major political parties. They filed a “notice of interest” in Character.AI’s Chapter 11 bankruptcy case. Chapter 11 is a legal process that lets a company reorganize its finances while it works out what happens next.

Character.AI said it is filing for Chapter 11 and selling some assets to Disney. The attorneys general warned that transferring the company’s technology and assets could create serious risks. They pointed to the “highly sensitive” nature of many conversations, the large number of minors who use the service, and risks tied to specific product features.

The filing also says some states were already investigating Character.AI when the bankruptcy case began. According to a press release from James’ office, the states opened a probe in 2024 after a lawsuit from the mother of a 14-year-old who died by suicide. The lawsuit alleged the teen spoke with the chatbot moments before his death.

Why it matters

Bankruptcy can involve selling off parts of a business to repay creditors. For a chatbot service, that can raise a basic question, what happens to the chat logs and other personal data (like a diary that could change hands). State attorneys general are signaling early that privacy and child safety rules still apply, even if the company is being sold.

Source: The Verge AI