40 State Attorneys General Intervene in Character.AI Bankruptcy Over User Data

Forty bipartisan state attorneys general have formally intervened in Character.AI's bankruptcy case to demand protections for user data before the company sells its business to Disney. New York Attorney General Letitia James disclosed the intervention after a years-long multi-state investigation into the chatbot company.

The coalition filed a notice of interest in the bankruptcy proceeding, a legal step that flags regulators' concerns for the court. In the filing, the AGs said they acted "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."

Why is this happening now?

Character.AI announced on Tuesday that it was filing for Chapter 11 bankruptcy and selling some of its assets to Disney. That combination — an insolvency filing plus an asset sale — is exactly the scenario where consumer data often changes hands with little scrutiny.

Bankruptcy courts focus on maximizing value for creditors, not on privacy. When a company's most valuable asset is a trove of user conversations, those records can end up bundled into a sale unless a judge or a regulator steps in.

What are the attorneys general worried about?

The notice of interest warns of serious risk in the transfer of Character.AI's technology. The filing points to concerns that were truncated in the public excerpt, but the context is clear: the AGs have spent years investigating the company, and they don't want that record lost in a fire sale.

James, who revealed the investigation's existence this week, framed the filing as a consumer-protection measure. The multi-state probe predates the bankruptcy, which means regulators already had Character.AI in their sights before the Disney deal surfaced.

What's at stake for users?

Character.AI's users, many of them young people, have shared extensive personal conversations with the platform's chatbots. In a bankruptcy sale, that data becomes an asset — something a buyer acquires along with the technology.

The AGs' intervention signals that any transfer will face regulatory conditions, not just a price tag. The states want protections written into whatever deal the court approves.

The stakes go beyond one company. As AI startups burn through cash and consolidate, courts will increasingly decide what happens to the intimate data these platforms collect — and state regulators are making clear they intend to be in the room when those deals are struck.