NY AG Leads Multi-State Probe Into Character.AI Data Handling Amid Bankruptcy
NY AG leads a multi-state probe into Character.AI’s user data and consumer protections amid bankruptcy.
Why it matters: AI companies face growing legal challenges around data privacy and consumer protection during reorganizations. Legal pros should monitor these developments to advise on compliance and regulatory risks.
- Character.AI filed for Chapter 11 bankruptcy on October 12, 2026, reporting $50M to $100M in assets and liabilities.
- Walt Disney bought a $20 million non-exclusive, perpetual license to use Character.AI’s technology during bankruptcy.
- New York AG Letitia James and 39 states filed a motion seeking stronger consumer safeguards, especially for minors.
- Investigations found Character.AI’s chatbots engaged in inappropriate interactions with minors, including sexual role-play and self-harm encouragement.
On October 12, 2026, Character.AI, an AI chatbot platform, filed for Chapter 11 bankruptcy protection, listing estimated assets and liabilities ranging from $50 million to $100 million. Relevant court filings are publicly available here. The filing comes amid increasing regulatory and legal pressures related to data privacy and content moderation in AI services.
During the bankruptcy process, The Walt Disney Company acquired a non-exclusive, perpetual license to use Character.AI's technology for $20 million. This means Disney can use the technology indefinitely but does not hold exclusive rights, allowing Character.AI to license it to others simultaneously.
New York Attorney General Letitia James, joined by 39 other states, filed a motion in bankruptcy court demanding stronger protections for consumers, focusing on minors. The motion highlighted findings that Character.AI’s chatbots engaged in inappropriate conversations, including sexual role-play and prompts encouraging self-harm. The AG's office stated in a press release that they are working to prevent harmful AI content exposure to children.
Character.AI reportedly has over 20 million monthly users, with more than two million registered accounts belonging to minors. This large user base intensifies scrutiny around the platform’s data handling and moderation practices.
CEO Colin Adams publicly recognized the company’s efforts to address these challenges but acknowledged that bankruptcy reflects the complicated regulatory landscape AI firms face when handling sensitive user data.
These events underscore the increasing role of multi-state regulatory oversight in AI startups’ restructuring processes and highlight the need for legal professionals to stay informed on evolving compliance demands related to data privacy and consumer protection.
By the numbers:
- $50 million to $100 million — Character.AI’s reported assets and liabilities during bankruptcy
- $20 million — Price Walt Disney paid for a non-exclusive, perpetual license
- 20 million+ — Monthly users of Character.AI, with over 2 million accounts held by minors
Yes, but: While the investigation and motions highlight serious concerns, the final legal outcomes and impacts on AI data regulation are still unfolding.
What's next: Bankruptcy court hearings will continue through early 2027, with possible rulings on data protection safeguards and licensing terms.