NY Attorney General Leads Multi‑State Push for Data Safeguards as Character.AI Enters Bankruptcy

New York Attorney General Letitia James announced Tuesday that a multi‑state investigation into artificial‑intelligence chatbot provider Character.AI will intensify as the company files for Chapter 11 bankruptcy, seeking court‑ordered protections for the personal data of its millions of users.

Character.AI, which rose to prominence by offering conversational agents that learn from user input, has amassed a large user base that includes both casual users and developers integrating the service into third‑party applications. The platform stores chat histories, preferences, and, in some cases, demographic details that could be considered personally identifiable information under state privacy statutes.

The investigation, described by James as spanning several years, involves a coalition of 40 state attorneys general from both parties. The group filed a notice of interest in the bankruptcy proceeding, asking the court to prevent the unrestricted sale or transfer of the company’s data assets without robust consumer‑privacy safeguards.

In a Chapter 11 filing, a debtor can sell assets to satisfy creditors, and data is often treated as a valuable commodity. Without explicit court direction, a buyer could acquire the entire user‑generated dataset, raising concerns that the information might be repurposed for advertising, profiling, or other commercial uses without the consent of the individuals who generated it.

James and the participating AGs are invoking state privacy laws—including New York’s SHIELD Act and similar statutes in other jurisdictions—to argue that the data should be protected as a consumer asset rather than a freely marketable item. Legal precedent on privacy in bankruptcy is still evolving, but courts have occasionally ordered that personal data be segregated or destroyed when its sale would violate statutory protections.

The outcome of the proceeding could set a benchmark for how AI‑driven companies handle user data in insolvency. If the court imposes strict data‑privacy conditions, it may limit the pool of potential buyers and affect the restructuring plan. Conversely, a ruling that allows the data to be sold without additional safeguards could prompt calls for federal legislation to clarify the treatment of digital personal information in bankruptcy cases. For now, users of Character.AI are left awaiting the court’s decision on whether their conversational histories will remain private or become part of a commercial transaction.