With Character.AI Going Bankrupt, What Happens to All Its Users' Data?

New York Attorney General Letitia James has revealed a multistate investigation into Character.AI, as the state now seeks to protect consumer data being sold through its bankruptcy process. James is one of 40 bipartisan members who have filed a notice of interest in Character.AI's bankruptcy case “to alert all parties to regulatory issues that […]

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State AGs are now trying to make sure their users' private chats aren't exposed to the highest bidder.

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is a senior politics reporter at The Verge, covering the intersection of Silicon Valley and Capitol Hill. He spent 5 years covering technology policy at CNBC, writing on antitrust reform, privacy and content modification.

New York Attorney General Letitia James disclosed a multi-state investigation against the company as they now seek to protect the consumer data sold through its bankruptcy proceedings.

James is one of 40 bipartisan firms that filed a notice of interest in the bankruptcy case to inform all parties of the regulatory issues that must be considered in any sale or transfer of the debtor's business or assets. It announced Tuesday that it will file for Chapter 11 and sell some assets to Disney. But the AGs warn that there may be a serious risk of transfer of this technology due to "the highly sensitive nature of many users' conversations with chatbot characters, the large number of minors using the product, the serious risks posed by certain product features."

The filing also shows that several states were in the middle of investigations when they filed for bankruptcy. In 2024, the states say they launched an investigation over consumer protection and privacy concerns after a complaint was filed by the mother of a 14-year-old who allegedly died by suicide "seconds" after talking to the chatbot.

"Investigation uncovers very serious risks"

According to a press release from James' office, "the investigation uncovered very serious risks and potentially illegal conduct, particularly its treatment of children, including chatbots posing as licensed professionals, exposure to sexual and violent content, weak age verifications, misleading safety claims, and potential violations of state privacy laws." The states were working to resolve these issues, but failed to reach an agreement before the company filed for bankruptcy. and Disney did not immediately respond to requests for comment.

States require a judge to require the buyer of the assets to implement procedures that protect sensitive information held by the company. These include effective age assurance systems, restrictions on how minors interact with chatbots, implementing "crisis safeguards" and allowing users to delete their data. "The company collected some of the most private thoughts kids have ever shared, and now those conversations can be sold to the highest bidder," James said in a statement. "I'm fighting to make sure every buyer puts children's safety first and puts real safeguards in place.

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