Character.AI bankruptcy raises user data concerns

New York Attorney General Letitia James and 40 bipartisan state attorneys general have taken an unusual step in the bankruptcy of Character.AI, filing a notice of interest that asks the court to protect consumer data. The multi-state group is investigating how the AI companion company collected, stored, and used personal information, and what will happen to that data as the business restructures or sells assets. The attorneys general argue that users deserve clear answers before any sensitive records are transferred, deleted, or monetized. Character.AI-style apps invite people to share emotions, relationships, mental health struggles, and other intimate details. That makes the data highly sensitive, even if it was typed into a chatbot rather than a social network. If the company's databases become part of a bankruptcy estate, customers could lose control over information they never expected to be treated as a tradable asset. The filing highlights a gap in U.S. privacy law: there is no single federal rule that automatically governs what happens to user data when an AI company fails or sells itself. State laws offer uneven protections, and many terms of service give companies broad latitude. The attorneys general want safeguards such as notice to users, limits on data transfers, and possibly a requirement that buyers honor existing privacy commitments. The outcome could set a precedent for other AI companion services, especially as the market grows. It may also push lawmakers to clarify data rights in insolvency. For users, the case is a reminder that conversations with AI are not truly private diaries. They are data, and their fate may depend on courts, contracts, and regulators.