Character.AI Bankruptcy: State AGs Warn on Private Chat Data

A coalition of 39 state attorneys general and the District of Columbia filed a notice dated October 14, 2026 in Character Technologies' Chapter 11 case, Bankr. D. Del. No. 26-11603-BLS, warning that any sale of Character.AI's private chat logs should carry privacy and child-safety protections.

Information last verified on October 20, 2026. This is a developing story; we update it as the record changes.

Status: The document is a Notice of Interest and Reservation of Rights dated October 14, 2026, filed in the Chapter 11 case of Character Technologies, Inc. It reserves rights rather than requesting relief. No motion to appoint a consumer privacy ombudsman was filed in this document. Nothing in the notice has been granted or denied, and as of October 20, 2026 we had found no order ruling on it and no ombudsman appointment. Our review was of the filed copy of the notice and the claims agent's case page, not of the live Delaware docket, which we could not reach this run, so treat any statement here about what else has been filed or approved in the case as unconfirmed.

Jurisdiction scope: This article covers a filing in a United States bankruptcy case, the federal Bankruptcy Code provisions that filing invokes, and how state consumer-protection and privacy law reaches a bankruptcy sale. It does not assess the merits of the private wrongful-death suits against Character Technologies, and it is not a guide to filing a claim in the Chapter 11 case. For the state-law backdrop, see how the state comprehensive privacy laws compare.

What Happened

Character Technologies, Inc., the company behind the Character.AI companion chatbot platform, filed a voluntary Chapter 11 petition on October 12, 2026 in the United States Bankruptcy Court for the District of Delaware, Case No. 26-11603 (BLS), assigned to Judge Brendan Linehan Shannon. Two days later, on October 14, 2026, a coalition of state attorneys general filed a Notice of Interest and Reservation of Rights addressing what the filing calls the debtor's outstanding regulatory, safety and privacy issues.

The notice is not a motion. It asks for no order and sets no hearing. Its stated purpose is to put the court, the company and any prospective buyer on notice of regulatory issues that the States say will have to be addressed in any sale, and it preserves the States' ability to act later in the case.

The States explain the timing in the document itself. They filed, they write, because of "the highly sensitive nature of the conversations many users have with Character.AI chatbot characters, the large number of minors who use the product, the serious risks posed by specific features of the product, and the speed at which bankruptcy cases progress," and they filed "out of an abundance of caution and to put all parties on notice of the regulatory issues that will need to be addressed in any sale or transfer of the Debtor's business or assets."

The operative sentence sits in the final paragraph:

"Each State reserves its rights, including the right to seek the appointment of a consumer privacy ombudsman under 11 U.S.C. §§ 332 and 363(b)(1), to object to any proposed sale, bidding procedures, or plan, to supplement this Notice, or to seek other relief." States' Notice of Interest and Reservation of Rights, at 24 to 25, dated October 14, 2026

Read that carefully, because the distinction matters. The States reserved the right to seek an ombudsman. They did not ask for one in this filing.

The label has already drifted. The New York Attorney General's release describes the coalition as filing a motion, while the document it links is captioned a notice of interest and reservation of rights and requests no relief. The caption controls here: as of October 20, 2026 the States have requested no specific relief and no order. The notice closes by asking the court, the debtor and any potential purchasers to ensure that any sale carries terms of protection, but it moves for nothing.

How many states actually signed

The caption of the as-filed document lists 40 distinct jurisdictions: 39 states and the District of Columbia. Massachusetts appears twice, once in the opening list of offices and again further down through an assistant attorney general, which is why a naive count of the caption comes out one too high, at 41 entries for 40 jurisdictions. The attorneys general of Alabama, Arizona, Florida, Iowa, Maryland, Missouri, Montana, Nebraska, New Mexico, Texas and Wyoming are not in the caption.

The coalition's own releases line up with that total. The New York Attorney General described joining "a bipartisan coalition of 39 other attorneys general" on October 14, 2026, and the Connecticut Attorney General's release the same day named 39 joining offices alongside Connecticut, the same 40 jurisdictions. Connecticut also used its release to disclose its own investigation into the company.

The notice reports that only Kentucky has sued so far, in an action filed January 8, 2026 in Franklin Circuit Court against the company and its co-founders, and that several other States issued subpoenas, civil investigative demands or information requests and obtained documents from the company. The States say they worked with the company on terms to resolve those issues and did not reach agreement before the bankruptcy filing.

Why the Chat Archive Is a Hard Privacy Problem

The substance of the filing is less about the company's finances than about one asset: the stored contents of users' conversations. The notice inventories what the company holds, including account names and login emails with declared ages, the text of chats and audio-call interactions, behavioral and engagement data, device and tracking identifiers, and subscription payment details for paid tiers.

The States then set out why that archive is harder to handle in a sale than an ordinary customer list. Their reasons are worth stating plainly, because they are structural rather than rhetorical.

First, the detailed nature and volume of the sensitive personal information collected. Separately, the notice argues that companion chatbots draw disclosure well beyond an ordinary entertainment application, pointing to the volume of best-friend and romantic characters on the platform.

Second, sensitive material is woven through long conversations rather than sitting in labeled fields, which the States say makes it difficult to find, redact or remove.

Third, deidentification may not work. A chat history that discusses a user's job, living arrangements and locale can identify the user even with the name stripped, "making traditional methods of deidentification impossible in such cases."

Fourth, expectations. The notice argues users disclosed under heightened privacy expectations, pointing to independent testing in which therapist-styled characters told testers their conversations were confidential and would not be shared without permission, which the States say contradicted the product's own privacy policy and terms of service.

Fifth, the age problem. The States allege the product was widely used by minors without adequate age verification from 2022 through 2025, so historical chats likely contain children's sensitive information misclassified as adult data and hard to separate out of a bulk archive.

The notice adds a sixth concern that is specific to AI assets. Transferring historical chats for model training, the States argue, risks teaching a successor model the same behaviors, because generative models learn to imitate their training data. That is an argument about what a buyer could do with the corpus, not only about who holds it.

Every one of those points is an allegation the States make from their own investigations and from third-party testing they cite. No court has adjudicated any of it.

What the Law Actually Says

Three Bankruptcy Code provisions do the work here, and the sequence between them is the whole story.

The debtor runs its own case. Under 11 U.S.C. 1107(a), a Chapter 11 debtor in possession has all the rights and powers, and performs all the functions and duties, of a trustee, with statutory exceptions for trustee compensation and three section 1106(a) duties, and subject to limits the court prescribes. So the restrictions written for a "trustee" in the sale provisions apply to the company itself while it operates in Chapter 11.

Section 363(b)(1) is the gate, and it is conditional. The provision lets a trustee, after notice and a hearing, use, sell or lease estate property outside the ordinary course of business. It then carves out personal data, but only on a condition: "if the debtor in connection with offering a product or a service discloses to an individual a policy prohibiting the transfer of personally identifiable information about individuals to persons that are not affiliated with the debtor and if such policy is in effect on the date of the commencement of the case," the trustee may not sell or lease that information unless one of two things is true.

The first alternative is that "such sale or such lease is consistent with such policy." The second is that "after appointment of a consumer privacy ombudsman in accordance with section 332, and after notice and a hearing, the court approves such sale or such lease," giving due consideration to the facts and circumstances and "finding that no showing was made that such sale or such lease would violate applicable nonbankruptcy law."

Two consequences follow from that text. If a company's privacy policy permits transferring data in a merger, acquisition or bankruptcy, the statutory bar may never trigger, because there is then no disclosed policy prohibiting transfer to unaffiliated parties. And if the bar does trigger, it is not a prohibition on sale. It is a requirement of an ombudsman, notice, a hearing and a judicial finding.

We were not able to retrieve the current text of the Character.AI privacy policy this run, because that policy is served through a client-rendered page. The States' notice does not quote a change-of-control clause either. What the policy says on that point is therefore an open question on this record, and it is the question that decides whether the 363(b)(1) condition is even in play.

Section 332 defines an ombudsman narrowly. If a hearing is required under section 363(b)(1)(B), then "the court shall order the United States trustee to appoint, not later than 7 days before the commencement of the hearing, 1 disinterested person (other than the United States trustee) to serve as the consumer privacy ombudsman in the case." The ombudsman may appear and be heard, and must give the court information to assist it, which the statute says may include the debtor's privacy policy, the potential losses or gains of privacy to consumers, the potential costs or benefits to consumers, and alternatives that would mitigate potential privacy losses. A separate subsection provides that an ombudsman "shall not disclose any personally identifiable information obtained by the ombudsman under this title."

That is an informational and advisory office. Section 332 gives the ombudsman a voice at a hearing and a duty to inform the court. It does not give the ombudsman a veto, and nothing in the section binds the court to the ombudsman's recommendation.

What counts as personally identifiable information is narrower than people assume. Section 101(41A) defines the term through a list: first and last name, the geographical address of a physical residence, an electronic address including an email address, a telephone number dedicated to contacting the individual at that residence, a Social Security account number, and the account number of a credit card, when provided in connection with obtaining a product or service primarily for personal, family or household purposes. A chat transcript is not on that list.

The definition then adds a catch-all that does the heavy lifting. If identified in connection with one of the listed items, the term also covers a birth date or birth-certificate number, and "any other information concerning an identified individual that, if disclosed, will result in contacting or identifying such individual physically or electronically." Chat content tied to a named account with a login email is the route by which a transcript would have to reach the definition at all. The definition was added in 2005 and drafted around contact details, though, so a mental-health disclosure buried in a two-year conversation log fits the frame awkwardly.

What a privacy promise does in a bankruptcy sale. It does two separate things. Inside the bankruptcy, a disclosed policy prohibiting transfer is what switches on the 363(b)(1) gate. Outside it, a promise that turns out to be false is the classic predicate for a state unfair and deceptive practices claim, and that is the theory the States describe building from the company's safety and data-control representations.

State law reaches the sale through two doors. The first is 363(b)(1)(B)(ii), which asks the court to find that no showing was made that the sale would violate applicable nonbankruptcy law. That is where a state comprehensive privacy statute, a children's privacy rule, or a consent requirement for sensitive data becomes relevant to a sale order. State requirements vary considerably on sensitive-data consent, minors' data and opt-out rights, which is the landscape our state privacy law tracker and our guide to children's online privacy rules state by state cover.

The second door is the automatic stay's own exception. Section 362(b)(4) excepts from the stay the commencement or continuation of an action by a governmental unit "to enforce such governmental unit's or organization's police and regulatory power," including the enforcement of a judgment other than a money judgment. That is why a bankruptcy filing does not by itself stop a state regulatory action, and the States in this notice expressly reserve the right to bring police and regulatory actions. The wider framework for products like this one is still being assembled, as our overview of AI laws and regulation in the United States sets out.

What the States Want Written Into Any Sale

The notice sets out nine categories of process the States say they would advocate that any purchaser be prepared to implement. These are the States' requests and positions, not court-ordered conditions.

1. Age assurance. Age-verification or age-assurance measures that do not rely solely on self-declared birthdates.
2. Protections for minors. Keeping restrictions on minors' access to open-ended chats, and safeguarding minors in non-chat features such as Stories.
3. Removal of misleading chatbots. Removing characters that hold themselves out as therapists, psychologists, doctors, attorneys or other licensed professionals.
4. Crisis safeguards. Moderation and crisis-response protocols for self-harm, suicide, eating-disorder and substance-abuse content that cannot be defeated with a click-through.
5. A privacy program. Reasonable safeguards, accurate disclosures, risk assessments and consent requirements, including consent before processing sensitive data such as health information disclosed in chats.
6. Advertising opt-outs. Disclosure of any sale of personal data or disclosure for targeted advertising, opt-outs that work at the account level rather than device by device, and honoring opt-outs consumers already exercised.
7. Limits on secondary use. Not using chat content to train or fine-tune models, or for advertising, beyond the uses consumers and parents validly consented to.
8. Access and deletion. Keeping consumers' ability to access the data held about them, and allowing all consumers an opportunity to delete their data before any sale of that data.
9. Truthful marketing. No false or misleading representations about the product's safety, its suitability for minors, whether characters are human, or any character's credentials.

The notice credits the company with some steps already taken, including removing open-ended chat for users it identifies as under 18. It then makes the point that drives the whole filing: "Notably, this open-ended chat restriction is voluntary and could be rolled back at any time, including by a purchaser."

What Happens Next

The procedural path in a Chapter 11 asset case is reasonably standardized, and the notice is positioned against that path rather than inside it.

A debtor that intends to sell typically files a bidding procedures motion first, asking the court to approve auction mechanics, deadlines and any stalking-horse protections, and then a sale motion under section 363(b) seeking approval of the winning transaction after notice and a hearing. Objections are filed against those motions. The States' reservation of rights is addressed to exactly those filings. We were not able to reach the live Delaware docket this run, so we are not saying whether a bidding procedures motion has already been filed in this case.

Whether section 332 is triggered depends on whether a hearing is required under section 363(b)(1)(B), which in turn depends on whether the transaction involves personally identifiable information covered by a disclosed policy prohibiting transfer. If that hearing is required, the statute directs the court to order the United States trustee to appoint an ombudsman at least seven days before the hearing begins. A party can also ask the court to reach that question, which is the right the States reserved.

A sale is not the only route. Assets can also move under a Chapter 11 plan, which carries its own disclosure, voting and confirmation requirements, and the States reserved the right to object to a plan as well as to a sale.

As of October 20, 2026, the only date on the court-appointed claims agent's public case page for Character Technologies is the October 12, 2026 petition date; its dates panel lists no claims bar date and no sale hearing. That panel is not the docket, and the case page's docket table and sale-document sections did not load for us this run, so we are not asserting what has or has not been filed. The filing is Docket No. 33 in the case, stamped filed October 14, 2026, on the court-stamped copy posted by the New York Attorney General. We are not reporting hearing dates or later docket activity, because our review was of that filed copy rather than of the live Delaware docket.

Analysis: Why This Matters

The following is analysis from the Recording Law Editorial Team.

The reason this filing deserves a reader's attention has little to do with Character Technologies' balance sheet. It is that the case puts a question to a bankruptcy court that most privacy law has not had to answer: what is the status of an intimate conversation log when the company holding it stops existing.

Consumer privacy law in the United States rests mostly on the premise of an ongoing relationship between a person and a company. You read a policy, the company makes promises, regulators hold it to them. A Chapter 11 sale breaks that premise. The entity that made the promise may not survive the case, the buyer made no promise at all, and the asset being priced is the archive itself.

The Bankruptcy Code's answer to that problem is 21 years old and narrower than its reputation. Section 363(b)(1) does not say personal data cannot be sold. It says a disclosed no-transfer policy in effect on the petition date triggers a process, and that process ends in a judicial finding rather than a prohibition. Section 332 supplies an expert voice at the hearing, not a gatekeeper. A reader who expects the statute to function as a privacy shield will find that it functions as a procedural detour.

The closest factual comparison is the 23andMe bankruptcy, which we have covered in detail. There, a coalition of state attorneys general objected to the sale of millions of customers' genetic data. According to the Minnesota Attorney General's September 10, 2025 consumer alert, the court overruled the states' objection and the company was sold, in an equity sale, to TTAM Research Institute (since renamed 23andMe Research Institute), a nonprofit formed by the company's founder, after the states negotiated additional protections into the final sale agreement. Those protections included appointment of a consumer privacy ombudsman, the right to delete an account and all data into perpetuity, and annual independent external audits of data safeguards with summaries available to state regulators on request.

That is a useful comparison precisely because of how it ended. The objection did not stop the sale. What the states obtained came through negotiated terms attached to the deal, not through a ruling that the data could not change hands. The aftermath also ran well past the closing, as our coverage of the $18 million multistate settlement with 42 attorneys general and of California's suit against the successor entity shows. We draw no inference from any of that about how the Delaware court will handle this case, and we are not predicting an outcome.

Two differences between the cases are worth naming. Genetic data is categorically sensitive and sits in structured records, so it can be identified, segregated and governed by a term sheet. A chat corpus is unstructured prose in which a disclosure about a teenager's medication can appear in the middle of a role-play session, which is the practical force of the States' deidentification argument.

The buyer's interest differs too. Genetic data was valuable as a research dataset. Conversation logs are valuable as training data, which is why the States' request to bar secondary training use is the condition with the clearest commercial stake attached to it.

The last thing worth noticing is institutional. Forty jurisdictions signing a notice in the first week of a Chapter 11 case, two days after the petition, is a coordination signal rather than a litigation event. The wider pattern of state-level enforcement and legislation in this area shows up in Florida's suit against Netflix over children's data, and in the new state statutes written specifically for companion chatbots.

How This Affects You

What follows is general information, not advice about anyone's particular situation.

If you have used Character.AI, the most concrete thing in the record is the company's own representation, quoted in the States' filing, that users will "always have easy-to-use tools to access your data, delete your data, and delete your account." The notice also describes an online ticket system and an email route for access, correction and deletion requests, and a "Your Privacy Choices" screen for targeted-advertising opt-outs, while noting the States' allegation that the web opt-out is device-specific rather than account-wide.

Whether you have an enforceable deletion right, as distinct from a company-offered feature, depends on where you live. Several states' comprehensive privacy laws give residents rights to access and delete personal data and to opt out of its sale, with additional consent requirements for sensitive data and for minors. Those laws differ in who they cover and what they require, and a bankruptcy filing does not repeal them.

Parents of minors who used the platform are in a different position again, because children's privacy rules can apply on top of a general state privacy law. The federal framework and the pending federal age-verification proposals are covered separately in our COPPA and age-verification guides, linked below.

If you want to follow the case itself, the court-appointed claims agent maintains a free public case page, and filings are available through the court. Be cautious about any site that offers to file something for you or asks for personal details related to this bankruptcy. Recording Law is not the court, the claims agent, a party, or any administrator in this case, and we do not collect claim information.

Finally, nothing in this filing establishes that any individual has a legal claim against anyone. The notice contains allegations drawn from state investigations. Whether any particular person has a remedy is a question for a lawyer licensed where that person lives.

This is general legal information, not legal advice. It covers a United States bankruptcy proceeding, the federal Bankruptcy Code provisions that proceeding invokes, and the general interaction with state consumer-protection and privacy law, and it reflects sources verified on October 20, 2026. Laws change and this story is developing. Consult a lawyer licensed in your jurisdiction about your specific situation.

Related articles

• AI Laws and Regulation in the United States
• COPPA Compliance Guide: Children's Online Privacy Protection
• KOSA and COPPA 2.0: Federal Age-Verification Legislation
• California SB 1119: Adam's Law for AI Companion Chatbots
• Hawaii Enacts the AI Disclosure and Safety Act (Act 248), Regulating Chatbots
• Florida Sues Netflix Over Children's Data Under State Privacy Law
• 23andMe Data Breach Settlement: Payments Expected September 2026
• US Data Broker Registration Laws and the Delete Act

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Last updated: 2026-10-20. This is a developing story; details verified as of 2026-10-20.

Frequently Asked Questions

Did a court order Character.AI to protect user chat data?

No. The October 14, 2026 document is a notice of interest and reservation of rights, not a motion or an order. As of October 20, 2026 no court has ruled on it, no consumer privacy ombudsman has been appointed, and no sale or bidding procedures have been approved or blocked.

How many states signed the Character.AI bankruptcy filing?

The caption of the as-filed notice lists 40 jurisdictions: 39 states and the District of Columbia. Massachusetts appears twice in the caption, once in the opening list of offices and again through an assistant attorney general, which is why a naive count of the caption comes out one too high, at 41 entries for 40 jurisdictions. The New York Attorney General described a bipartisan coalition of 39 other attorneys general, and the Connecticut Attorney General named 39 joining offices alongside Connecticut, both totalling the same 40 jurisdictions.

What is a consumer privacy ombudsman under 11 U.S.C. 332?

If a hearing is required under 11 U.S.C. 363(b)(1)(B), the statute directs the court to order the United States trustee to appoint one disinterested person, at least seven days before the hearing, to give the court information about a proposed sale or lease of personally identifiable information. The role is advisory. The statute gives the ombudsman no veto and bars the ombudsman from disclosing personally identifiable information.

Can a bankrupt company sell customers' personal data?

Section 363(b)(1) restricts it only where the debtor disclosed a policy prohibiting transfer of personally identifiable information to unaffiliated parties and that policy was in effect on the petition date. Even then the sale can proceed if it is consistent with that policy, or if the court approves it after an ombudsman is appointed and after notice and a hearing.

Does a bankruptcy filing stop state attorneys general from suing?

Not automatically. 11 U.S.C. 362(b)(4) excepts from the automatic stay an action by a governmental unit to enforce its police and regulatory power, including enforcement of a judgment other than a money judgment. In this notice the States expressly reserved the right to bring police and regulatory actions, and the notice reports that Kentucky had already sued in Franklin Circuit Court on January 8, 2026.

What happened to user data in the 23andMe bankruptcy?

According to the Minnesota Attorney General's September 10, 2025 consumer alert, the court overruled the state attorneys general objection and the company was sold in an equity sale to TTAM Research Institute, after the states negotiated added protections into the final sale agreement, including a consumer privacy ombudsman appointment, perpetual account and data deletion rights, and annual independent audits of data safeguards.

What are the states asking a buyer of Character.AI to do?

The notice sets out nine categories: age assurance beyond self-declared birthdates, protections for minors across chat and non-chat features, removal of chatbots posing as licensed professionals, crisis-response safeguards, a privacy program with consent for sensitive data, account-level advertising opt-outs, limits on using chats for model training, access and pre-sale deletion, and truthful marketing. These are the States' positions, not court-ordered conditions.