The states' concerns center on the company's chatbots, which include celebrity and cartoon personas and some that present themselves as psychologists, therapists, and doctors. New York's Attorney General cited testing that recorded 669 harmful interactions in 50 hours with accounts registered to children aged 12 to 15. The states say the bots impersonated licensed professionals and exposed children to sexualized interactions. The company says it has invested heavily in safety, including ending open-ended chat for users under 18, and disputes the states' account. The notice asks that age verification, crisis response, and protections against fake professionals stay in place in any sale.
The investigations trace to a 2024 wrongful death lawsuit, after which several states probed the company for possible consumer protection and privacy violations. Character.AI filed for bankruptcy late on October 12 and is using Chapter 11 to resolve state investigations and lawsuits. It plans to license its technology to Disney for $20 million and to find a buyer for its chatbot business. At the first hearing before Judge Brendan Shannon in Wilmington, the states' attorney said the states are negotiating a settlement with the company. Character.AI's lawyer said no buyer has yet made an offer for user data or the chatbot business.
Watch the sale process. The bankruptcy creates a near-term decision point, since a sale could transfer large volumes of private chat data and child-facing products to a new owner. The states have reserved the right to challenge any sale or plan, so the coming proceedings will test how state consumer protection law applies in bankruptcy. Attorneys advising AI companion companies, buyers, or lenders with exposure to minors' data should track the Delaware docket closely. The case also adds to broader scrutiny of AI companion products and minors.