NY Attorney General Amplifies Multi‑State Data Protection Effort as Character.AI Seeks Chapter 11

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 files for Chapter 11 bankruptcy, aiming for court‑mandated safeguards for the personal information of its millions of users.

Character.AI gained fame by providing conversational agents that adapt to user input, attracting a sizable audience that ranges from everyday users to developers who embed the service in third‑party apps. The service retains chat logs, user preferences, and occasionally demographic data that may qualify as personally identifiable information under various state privacy laws.

James characterized the probe as having lasted several years and noted that it includes a coalition of 40 state attorneys general from both parties. The coalition submitted a notice of interest in the bankruptcy case, urging the court to block any unrestricted sale or transfer of the firm’s data assets without strong consumer‑privacy protections.

Under Chapter 11, a debtor may liquidate assets to pay creditors, and data is frequently regarded as a high‑value commodity. Absent a specific court order, a purchaser could obtain the complete user‑generated dataset, sparking worries that the information could be reused for advertising, profiling, or other commercial purposes without the consent of the individuals who created it.

James and the other AGs are citing state privacy statutes—including New York’s SHIELD Act and comparable laws elsewhere—to contend that the data ought to be treated as a consumer asset instead of a freely tradable commodity. While legal precedent on privacy in bankruptcy remains unsettled, courts have at times mandated that personal data be separated or destroyed when its sale would breach statutory safeguards.

The result of the case could establish a precedent for how AI‑focused firms manage user data during insolvency. Should the court enforce stringent data‑privacy requirements, the pool of prospective buyers might shrink, influencing the restructuring strategy. On the other hand, a decision permitting the data’s sale without extra protections could spark 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 private or become a commercial asset.