Character.AI Bankruptcy Faces New Hurdle as 40 State AGs Raise Safety, Privacy Fears

A coalition of 40 state attorneys general is raising concerns about child safety and data privacy amid Character.aI’s bankruptcy, warning that sensitive conversations between users and AI chatbots could be transferred to a new owner without adequate protections.

In a notice filed Oct. 14 in the U.S. Bankruptcy Court for the District of Delaware, the attorneys general said unresolved regulatory issues must be addressed in any sale or transfer of Character Technologies Inc., the company behind the AI chatbot platform, National Law Review reported.

"The National Association of Attorneys General’s filing and presentation is not an accurate portrayal of the safety of our platform. Character.ai takes the safety of its users and its platform extremely seriously, especially as it relates to minors. Character.ai has and continues to monitor its platform to prevent and remove content that violates its standards and policies," a spokesperson for Character.ai told Benzinga.

The coalition’s concerns follow investigations into Character.ai after a wrongful-death lawsuit alleged that one of its chatbots encouraged a 14-year-old boy’s suicidal thoughts before his death by suicide.

According to the states’ filing, investigators also identified chatbots that allegedly engaged in sexual conversations with minors, encouraged violent behavior and presented themselves as licensed mental health professionals.

Testing cited by New York Attorney General Letitia James’ office identified 669 harmful interactions during 50 hours of testing with accounts registered to children ages 12 to 15. The largest category, with 296 instances, was grooming and sexual exploitation, the document stated.

The spokesperson for Character.AI said the company has invested heavily in user safety, including ending open-ended chat for users under 18, introducing age-verification and age-estimation technology, and adding disclaimers that its AI characters are fictional. The company also uses content filters, screen-time reminders and mental health helpline partnerships, while maintaining additional safeguards for younger users, including filtered characters and parental insights.

The attorneys general also questioned whether Character.ai’s age-verification measures and restrictions for younger users provide sufficient protection, arguing that safeguards can be circumvented.

The bankruptcy process could complicate those efforts, the states warned, because a new owner could potentially weaken or reverse existing protections.

Sensitive Data Could Change Hands

The filing has also raised concerns about the information Character.ai collects, including private chat histories, voice-call records, age information, emotional and health-related disclosures, and behavioral data.

That information could be transferred as part of a bankruptcy sale, raising questions about how a buyer might use it for advertising, personalization or AI training.

The coalition also wants users to have an opportunity to access and delete their personal information before a sale. The attorneys general said they had attempted to resolve their concerns with Character.AI before its bankruptcy filing but had not reached an agreement.

The states urged any potential buyer of Character.AI to maintain safeguards covering age verification, minors’ access to chatbots, crisis response and misleading characters posing as licensed professionals. 

They also called for stronger privacy protections, advertising opt-outs, limits on using chat data for AI training or commercial purposes, data access and deletion rights, and truthful marketing about the platform’s safety and characters.

The notice also stated that the attorneys general may challenge any proposed sale process or bankruptcy plan and urged the court to consider appointing an independent consumer privacy ombudsman.

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