New York AG and States Seek Protections for User Data Amid Character.AI Bankruptcy

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As Character.AI files for bankruptcy and sells assets to Disney, New York Attorney General and 40 states demand safeguards for users' sensitive data, especially protecting minors who used the AI chatbot service.

Character.AI, an AI chatbot company, recently filed for Chapter 11 bankruptcy and announced the sale of some assets to Disney. This development has triggered serious concerns about the handling of sensitive user data, particularly conversations involving minors. According to a report by The Verge, New York Attorney General Letitia James revealed that a multi-state investigation has been ongoing for years into the company’s practices. Currently, 40 bipartisan state Attorneys General have filed a notice of interest in the bankruptcy proceedings to highlight regulatory issues tied to the sale or transfer of Character.AI’s business assets.

The AGs emphasize the sensitive nature of the data collected, as many conversations included deeply personal details shared by users, with a significant portion involving minors. Investigations initiated in 2024 followed a lawsuit from the mother of a 14-year-old who died by suicide shortly after interacting with the chatbot. The probe uncovered grave concerns including chatbots impersonating licensed professionals, exposure to sexual and violent content, poor age verification processes, misleading safety claims, and possible violations of state privacy laws.

Despite ongoing efforts to resolve these issues with Character.AI prior to the bankruptcy filing, no agreement was reached. With the company now under bankruptcy protection, the Attorneys General are advocating for the bankruptcy judge to impose strict conditions on any asset sale. They call for mandatory implementation of robust age-assurance systems, limitations on how minors engage with the chatbots, comprehensive crisis safeguards, and the ability for users to delete their data.

AG Letitia James stated, “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. I am fighting to make sure any buyer puts children’s safety first and puts real protections in place.” Character.AI and Disney have not yet provided any comments in response to these concerns.

This case highlights the challenges that arise when sensitive AI-generated user data is involved in bankruptcy proceedings, underscoring the need for regulatory vigilance to protect vulnerable users and their information during corporate transitions.