40 state attorneys general demand safeguards for user data in Character.AI bankruptcy

Character.AI announced on Tuesday that it was filing for Chapter 11 and selling some of its assets to Disney, and a bipartisan group of 40 state attorneys general is now asking the bankruptcy court to make any deal contingent on protecting user data, The Verge reports.

New York Attorney General Letitia James is among the AGs who filed a notice of interest in the case. The notice, the states wrote, is intended "to put all parties on notice of the regulatory issues that will need to be addressed in any sale or transfer of the Debtor's business or assets."

The core concern: chat logs as sellable assets

The attorneys general point to three specific risks, according to The Verge: the highly sensitive nature of the conversations many users have with the platform's chatbot characters, the large number of minors who use the product, and serious dangers posed by particular product features.

Their proposed remedy is a set of binding conditions on whichever entity ends up owning the assets. The states are urging the judge to require the purchaser to implement effective age-assurance systems, restrictions on how minors can engage with the chatbots, dedicated "crisis safeguards," and tools that let users delete their data.

"This company collected some of the most private thoughts children have ever shared, and now those conversations could be sold off to the highest bidder," James said in a statement. "I am fighting to make sure any buyer puts children's safety first and puts real protections in place."

An investigation interrupted by bankruptcy

The filing also reveals that several states were still mid-investigation when Character.AI entered bankruptcy. According to The Verge, the states opened a probe into consumer protection and privacy concerns in 2024, following a lawsuit from the mother of a 14-year-old who died by suicide allegedly seconds after talking with the chatbot.

A press release from James' office says the investigations uncovered "exceptionally serious dangers and potentially unlawful conduct," citing chatbots posing as licensed professionals, exposure to sexual and violent content, weak age checks, misleading safety claims, and potential violations of state privacy laws.

The states say they had been working with Character.AI to address these issues but never reached an agreement before the Chapter 11 filing. The Verge reports that neither Character.AI nor Disney immediately responded to requests for comment.

Why it matters

Bankruptcy proceedings are built to maximize value for creditors, and for an AI chatbot company, the archive of user conversations is among the most valuable property on the table. The attorneys general's filing is an attempt to attach enforceable privacy and safety conditions to the transfer of that property before a sale closes, testing whether regulators can intervene in real time when a data-heavy startup collapses rather than cleaning up afterward.

The case also shows how a bankruptcy filing can freeze or sidestep live regulatory negotiations. The states say they were still in enforcement discussions with the company when Chapter 11 landed, leaving a bankruptcy judge, rather than consumer protection regulators, as the venue where the terms of any deal get shaped.

For Character.AI's users, many of them minors who shared intimate personal details with chatbot characters, the practical question is whether the next owner of that data will be bound by stronger protections than the original company faced. The outcome here could set a template for what happens to user data when other AI startups fail, a question likely to recur as the industry consolidates.