Forty state AGs move to protect Character.AI user data

A coalition of 40 bipartisan state attorneys general filed a formal notice of interest in Character.AI's Chapter 11 bankruptcy proceeding to safeguard sensitive consumer data during asset liquidation. The move comes after Character.AI announced it was filing for bankruptcy and planning to sell select technology assets to Disney. State officials warn that transferring the startup's conversational technology risks exposing highly personal user chat logs and children's private interactions to third-party buyers.

Led by New York Attorney General Letitia James, the filing discloses that multiple state regulatory agencies had been conducting a joint consumer protection investigation into Character.AI prior to the bankruptcy. That probe was initiated in 2024 following a lawsuit tied to the death of a 14-year-old user who died by suicide seconds after interacting with the chatbot. Investigators uncovered severe safety concerns, including chatbots impersonating licensed professionals, inadequate age-verification systems, user exposure to violent or sexual material, and potential breaches of state privacy statutes.

Because state authorities were unable to finalize a settlement agreement with Character.AI before the company entered Chapter 11, the attorneys general are urging the bankruptcy judge to mandate strict safeguards on any asset sale. They demand that any prospective purchaser enact robust age-assurance mechanisms, restrict minor interactions, establish dedicated crisis safeguards, and allow existing users to delete their personal data before assets change hands.

For AI developers and industry practitioners, this regulatory intervention sets a significant precedent regarding user data rights during corporate distress and asset liquidations. As conversational AI startups train models on intimate user transcripts, regulatory bodies are making clear that bankruptcy courts cannot serve as a loophole to bypass state privacy laws or sell unredacted consumer data.