Character.AI Bankruptcy Triggers Joint Data-Protection Intervention by 40 State Attorneys General

Character.AI filed for Chapter 11 bankruptcy on Tuesday and plans to sell some assets to Disney. The New York Attorney General's office disclosed that multiple states have been investigating the company for consumer protection and privacy since 2024, triggered by a lawsuit over a 14-year-old in Michigan who died by suicide "within seconds" of talking to a chatbot. Findings include chatbots impersonating licensed professionals, exposing minors to sexual and violent content, weak age checks, misleading safety claims, and possible violations of state privacy laws. The 40 bipartisan attorneys general filed a notice of interest demanding these regulatory issues be addressed at any stage of the bankruptcy sale or asset transfer. For the states, if assets are sold to the highest bidder without data protections in place, vast amounts of sensitive chat logs could change hands without deletion or anonymization. This directly affects ordinary Character.AI users, especially minors and their parents. State prosecutors want the judge to require buyers to implement effective age-assurance systems, restrict how minors use chatbots, add "crisis safety mechanisms," and let users delete their data. For companies evaluating a purchase of Character.AI's assets, including Disney, the deal is no longer just about price—it comes with compliance preconditions. If the court adopts the attorneys' general conditions, buyers must first build minor-protection and data-deletion capabilities, changing the closing timeline and cost. Character.AI and Disney did not respond to requests for comment.