On October 14, 2026, a coalition of 40 state attorneys general urged a Delaware bankruptcy judge to enforce strict safety and privacy safeguards in Character.AI's Chapter 11 proceedings. The states warn that over 21.6 million U.S. users' private chat logs—including messages from 2.1 million minors—could be sold off to buyers. While Walt Disney agreed to a $20 million deal for technology licenses and staff, it excluded user data, leaving sensitive conversation logs on the auction block.
State attorneys general bankruptcy demands
- ▪Forty state attorneys general filed a notice of interest in the U.S. Bankruptcy Court for the District of Delaware establishing nine safety and privacy conditions for any buyer acquiring Character.AI assets.
- ▪A coalition of 40 state attorneys general urged a U.S. bankruptcy judge in Wilmington, Delaware on October 14, 2026, to mandate safety and data protections for young users in the Character.AI Chapter 11 bankruptcy case.
User data and child accounts
- ▪New York Attorney General Letitia James stated on October 14, 2026, that Character.AI collected private thoughts shared by children that could potentially be sold off to the highest bidder in bankruptcy.
- ▪More than 2.1 million Character.AI U.S. user accounts created by March 2025 had a declared age under 18.
- ▪Character.AI's bankruptcy estate holds five categories of user data, including account info, session metrics, tracking identifiers, payment records, and full text/audio conversation logs for over 21.6 million U.S. accounts.
Character.AI bankruptcy filing and losses
- ▪Character.AI stated it was losing between $8 million and $9 million a month prior to its Chapter 11 filing due to legal expenses, high computing costs, and AI talent expenses.
- ▪Character.AI filed for Chapter 11 bankruptcy on October 13, 2026, listing estimated assets and liabilities between $50 million and $100 million.
Disney stalking-horse bid
- ▪Character.AI attorney Erin Fay stated that Walt Disney's $20 million bid explicitly excludes the operating chatbot app, brand, user data, and conversation logs.
- ▪Walt Disney agreed to serve as a stalking-horse bidder to license Character.AI technology and intellectual property for $20 million while hiring most of Character.AI's staff.
Impersonation of medical professionals
- ▪Character.AI chatbots impersonated licensed professionals, including characters named 'Psychologist' with over 20,000 interactions and 'Anna Pou' claiming to be an oncology head with nearly 66,000 interactions.
- ▪State attorney Abigail Ryan told U.S. Bankruptcy Judge Brendan Shannon that states are negotiating a settlement with Character.AI over claims chatbots impersonated medical professionals and exposed children to abusive content.
- ▪Pennsylvania's State Board of Medicine filed a lawsuit against Character.AI over a chatbot named 'Emilie' that claimed to be a doctor of psychiatry and provided a fake Pennsylvania medical license number.
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