New York AG Heads Multi‑State Effort to Protect User Data as Character.AI Files for Bankruptcy

On Tuesday, New York Attorney General Letitia James said the multi‑state probe into AI chatbot firm Character.AI will be stepped up as the company enters Chapter 11 bankruptcy, requesting that the court impose safeguards on the personal information of its millions of users.

Character.AI, known for its conversational agents that improve through user interactions, has built a sizable audience that spans casual participants and developers who embed the tool in external apps. The service retains chat logs, user settings, and occasionally demographic data that may qualify as personally identifiable information under various state privacy laws.

James characterized the inquiry as a multi‑year effort that brings together 40 state attorneys general from across the political spectrum. The coalition submitted a notice of interest in the bankruptcy case, urging the judge to block any unrestricted sale or transfer of Character.AI’s data assets unless strong consumer‑privacy protections are put in place.

Under Chapter 11, a debtor may liquidate assets to repay creditors, and data is frequently viewed as a lucrative commodity. Absent a specific court order, a purchaser could obtain the full set of user‑generated data, sparking worries that the material could be reused for advertising, profiling, or other commercial purposes without the original users’ consent.

James and the other AGs are citing state privacy regulations—such as New York’s SHIELD Act and comparable statutes elsewhere—to contend that the information ought to be treated as a consumer asset, not a freely tradable commodity. While case law on privacy in bankruptcy remains nascent, courts have at times mandated that personal data be separated or destroyed when its sale would breach statutory safeguards.

The decision in this case may establish a precedent for how AI‑focused firms manage user data during bankruptcy. Should the court enforce rigorous privacy requirements, the pool of prospective buyers could shrink, influencing the restructuring strategy. On the other hand, a judgment permitting the data’s sale without extra protections might trigger demands for federal legislation to define the handling of digital personal information in bankruptcy. Meanwhile, Character.AI users must wait for the court’s ruling on whether their chat histories stay confidential or become a commercial asset.