States seek safeguards for children’s data in Character.AI bankruptcy
Forty state attorneys general want a Delaware bankruptcy court to protect sensitive chats and require child-safety measures as Character.AI explores an asset sale.
Forty state attorneys general urged a US bankruptcy judge in Delaware on Wednesday, October 14, to protect children and sensitive user conversations as Character.AI moves through bankruptcy and considers selling assets. Their request could shape how the chatbot company handles user data and child-safety features in any transaction; it is not a court order.
The bipartisan group filed a notice of interest in the case, citing regulatory issues that could arise if Character.AI transfers its business or assets, The Verge reported. The states want safeguards for chat histories, along with stronger protections for minors who use the service.
What safeguards the states want for Character.AI users
According to The Verge, the requested measures include age-assurance systems, limits on minors’ engagement with chatbots, crisis safeguards and a way for users to delete their data. The states described the conversations’ sensitive content, the number of minors using the product and particular product features as reasons for concern. Those are arguments for protections during the bankruptcy process, rather than findings that the court has adopted.
The Verge reported that the states began investigating consumer-protection and privacy concerns in 2024 and had not reached an agreement with Character.AI before it filed for bankruptcy. In a release described by the outlet, the states alleged weak age checks, misleading safety claims and possible violations of state privacy laws. Those allegations remain unresolved in the reporting available for this article.
States’ attorney Abigail Ryan said the states had been negotiating a settlement over allegations that chatbots impersonated licensed medical professionals and exposed children to sexualized and abusive interactions, Reuters reported. Families have separately sued Character.AI over alleged harmful advice, sexualized or bullying interactions and alleged contributions to two children’s suicides. Reuters reported preliminary settlements with five families; the underlying allegations are not established court findings in these reports.
How a possible asset sale affects user data
Character.AI filed for Chapter 11 late on Monday, October 12. Reuters reported that the company is seeking to use the bankruptcy case to resolve state investigations and lawsuits while it looks for a buyer for its chatbot business. Its platform lets people interact with and create generative-AI characters customized through prompts, making the treatment of conversation histories a direct issue for users.
A lawyer for Character.AI said no buyer had yet offered to acquire its user data or operating chatbot business, according to Reuters. That leaves the handling of those assets in any eventual deal unsettled. The reported states’ request seeks to address that risk before a transfer takes place.
Reuters reported that Disney agreed to pay $20 million to license Character.AI technology and intellectual property and hire most of its staff. The proposed asset purchase requires bankruptcy-court approval and is subject to higher offers. It is distinct from an offer for the operating chatbot business or its user data, which the company’s lawyer said had not been made.
Character.AI attributed its filing to legal expenses and the cost of computing power and AI talent, Reuters reported. The company said it had been losing $8 million to $9 million a month before filing. Those pressures form the backdrop to the proposed transaction and the states’ effort to secure protections while the court considers the company’s assets.
Sources and context
- US states seek children's data protections in Character.AI bankruptcyCNA (Reuters report)
- Now that Character.AI is going bankrupt, what happens to all of its users’ data?The Verge
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