The Verge AI · 10/15/2026, 02:47:54
Character.AI Bankruptcy Sparks Data Privacy Crisis as 40 State AGs Block Chat Log Auctions
As Character.AI enters bankruptcy proceedings, its vast repository of private user chat logs faces the risk of being auctioned to the highest bidder. New York Attorney General Letitia James, joined by 39 other state AGs, has filed a notice of interest demanding court-ordered protections for consumer data. This intervention aims to establish strict boundaries for data disposal in failed AI companion products, prioritizing child safety and privacy.
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State AGs are now trying to make sure its users’ private chats aren’t exposed to the highest bidder.
State AGs are now trying to make sure its users’ private chats aren’t exposed to the highest bidder.
by Oct 14, 2026, 6 PM UTC
Image: Cath Virginia / The Verge, Getty ImagesLauren Feiner is a senior policy reporter at The Verge, covering the intersection of Silicon Valley and Capitol Hill. She spent 5 years covering tech policy at CNBC, writing about antitrust, privacy, and content moderation reform.
New York Attorney General Letitia James revealed a years-long multi-state investigation against Character.AI as they now seek to require protections on consumer data sold through its bankruptcy proceeding.
James is among 40 bipartisan AGs who filed a notice of interest in Character.AI’s bankruptcy case “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.” Character.AI announced Tuesday it was filing for Chapter 11 and selling some assets to Disney. But the AGs warn there could be serious risk involved in the transfer of the technology due to the “highly sensitive nature of the conversations many users have with Character.AI chatbot characters, the large number of minors who use the product, the serious risks posed by specific features of the product.”
The filing also reveals that several of the states had been mid-investigation when Character.AI filed for bankruptcy. The states say they 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.
“The investigations uncovered exceptionally serious dangers”
“The investigations uncovered exceptionally serious dangers and potentially unlawful conduct from Character.AI, particularly its treatment of children, including chatbots posing as licensed professionals, exposure to sexual and violent content, weak age checks, misleading safety claims, and potential violations of state privacy laws,” according to a press release from James’ office. The states were working to address these issues with Character.AI, but didn’t reach an agreement before the company filed for bankruptcy. Character.AI and Disney did not immediately respond to requests for comment.
The states are urging the judge to require the purchaser of Character.AI’s assets to implement procedures that will safeguard the sensitive information the company maintained. Those include effective age-assurance systems, restrictions on how minors can engage with the chatbots, implementing “Crisis safeguards,” and letting 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.”
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- Lauren Feiner