State Investigation
New York Attorney General Letitia James revealed a years-long multi-state investigation against Character.AI as authorities seek to require protections on consumer data sold through its bankruptcy proceeding.
Now that Character.AI is going bankrupt, what happens to all of its users’ data?
State attorneys general are working to ensure that private user chats are not exposed during the asset transfer.
Bankruptcy and Asset Sale
James is among 40 bipartisan state attorneys general who filed a notice of interest in Character.AI’s bankruptcy case to address regulatory issues regarding the transfer of business assets. Character.AI announced it was filing for Chapter 11 and selling some assets. However, officials warned of serious risks involving the transfer of technology due to the sensitive nature of conversations, the large number of minor users, and specific product features.
The filing also reveals that several states had active investigations when Character.AI filed for bankruptcy. The probes into consumer protection and privacy concerns began in 2024 following a lawsuit regarding the safety of minor users interacting with chatbots.
Regulatory Concerns
Investigations uncovered serious dangers and potentially unlawful conduct from Character.AI, particularly regarding its treatment of children, chatbots posing as licensed professionals, exposure to sexual and violent content, weak age verification, and potential violations of state privacy laws.
States were working to address these issues before the company filed for bankruptcy. Representatives for Character.AI did not immediately respond to requests for comment.
Demanded Safeguards
State officials are urging the judge to require any purchaser of Character.AI’s assets to implement procedures safeguarding sensitive information. Requested measures include effective age-assurance systems, restrictions on minor engagement, crisis safeguards, and user data deletion options to protect children and consumer privacy.
