State AGs Intervene in Character.AI Bankruptcy to Restrict Asset and Data Sale to Disney

A bipartisan coalition of 40 state attorneys general, led by New York Attorney General Letitia James, has filed a notice of interest in Character.AI's Chapter 11 bankruptcy proceedings to demand strict data protections prior to any asset transfer.

The intervention follows an announcement by Character.AI on Tuesday that it had filed for bankruptcy protection and agreed to sell select assets to Disney. In their filing, the attorneys general warned that transferring the platform's technology and records carries severe risks due to the highly sensitive personal conversations stored on the platform, its large underage audience, and specific product features that pose safety hazards.

As reported by The Verge (https://www.theverge.com/policy/1011417/new-york-ag-characterai-bankruptcy), the court filings disclose that several states were actively conducting a joint investigation into the company when the bankruptcy was filed. State authorities opened their consumer protection and privacy probe in 2024 following a lawsuit from the mother of a 14-year-old boy who died by suicide allegedly seconds after interacting with one of the platform's chatbots.

According to a press release from James's office, the state investigations uncovered serious risks and potentially unlawful conduct, including AI personas falsely presenting as licensed professionals, user exposure to sexual and violent material, weak age checks, misleading safety claims, and potential breaches of state privacy statutes. Regulators had been negotiating with Character.AI to resolve these compliance issues, but negotiations failed to produce an agreement before the bankruptcy filing.

The coalition is asking the bankruptcy judge to require any purchaser of Character.AI's assets to implement explicit safeguards. These proposed requirements include effective age-assurance systems, restrictions on how minors interact with chatbots, mandatory crisis safeguards, and mechanisms enabling users to permanently delete their data.

Neither Character.AI nor Disney immediately responded to requests for comment.