Attorney General Rob Bonta and a bipartisan group of states warn that the Menlo Park chatbot company’s archive of intimate user conversations, many of them with minors, should not change hands without binding safeguards.
By Staff Reporter
California has stepped into the bankruptcy of Character.AI, the Menlo Park company behind one of the most popular artificial-intelligence companion apps, warning that any buyer of its technology or data must accept protections for children and for the private conversations millions of users have shared with its chatbots.
Attorney General Rob Bonta announced on Thursday that California had joined a bipartisan coalition of state attorneys general in a notice of interest and reservation of rights filed on Oct. 14 in the United States Bankruptcy Court for the District of Delaware. Mr. Bonta’s announcement named 22 other states; the caption of the filing itself lists attorneys general from 39 states and the District of Columbia.
“Following Character.AI’s bankruptcy announcement, we ask the court to address privacy and safety concerns in any sale or transfer of the company’s business or assets,” Mr. Bonta said in a statement.
A fast sale with Disney as the opening bidder
Character Technologies Inc., which lists its address as 700 El Camino Real in Menlo Park, filed for Chapter 11 protection on Oct. 12, according to the court’s notice of the case. Rather than reorganize, it intends to sell substantially all of its assets in a court-supervised auction, and it has already lined up the Walt Disney Company as a “stalking horse,” the bidder whose offer sets the floor.
Under the bidding procedures motion filed on Oct. 13, Disney would pay $20 million in cash for a perpetual, worldwide, non-exclusive license to certain of Character.AI’s intellectual property and technology. Disney paid $7.5 million of that before the filing and has already hired what the company described as “the vast majority” of employees it offered jobs to, including the chief executive. If another bidder prevails, Disney would receive a break-up fee and expense reimbursement of $700,000.
Objections to the sale are due Nov. 13, bids on Nov. 20, an auction would follow on Nov. 23 and a sale hearing is proposed for Nov. 24, subject to the court’s schedule. The company has told users that if no workable bid emerges, “the platform will be wound down.”
Character.AI told the court that the cost of building AI entertainment, “coupled with potential litigation-related liabilities and regulatory engagement,” left it unable to generate enough cash. An investment bank it hired in August 2025 approached about 28 potential buyers or partners, and, according to the motion, the consistent feedback was that “the litigation and regulatory overhang on Character was too great.” The largest unsecured creditor on its petition is Google, owed about $4.1 million in trade payables; Google licensed Character.AI’s technology and rehired its two founders in 2024, CNBC reported.
What the states want from a buyer
The states’ filing is not an objection. It lays out why regulators believe the company’s data and design pose risks, and lists nine conditions they “would advocate” any purchaser accept. Those include age verification that does not rely on self-reported birthdays; keeping minors out of open-ended chats; removing characters that present themselves as therapists, doctors or lawyers; crisis protocols for self-harm and suicide “that cannot be defeated with a simple click-through”; account-level opt-outs from targeted advertising; and limits on using chat transcripts to train new models without valid consent. The states also want every user to have a chance to delete their data before any sale.
Citing the company’s own records as described in a lawsuit filed by Kentucky in January, the states said more than 21.6 million American accounts had been created by March 2025, including more than 2.1 million with a declared age under 18.
The states acknowledged that Character.AI has already barred users it identifies as minors from open-ended chats, but called the restriction voluntary, incomplete and something “a purchaser” could roll back. They reserved the right to seek appointment of a consumer privacy ombudsman, a mechanism the Bankruptcy Code provides when a debtor proposes to sell personal information in ways its privacy policy may not permit. Mr. Bonta’s office intervened in a similar fight last year, when the Bay Area genetic-testing company 23andMe went bankrupt and he urged customers to delete their data before it was sold.
California and other states opened investigations after a 2024 wrongful-death suit in federal court in Florida alleged that a Character.AI chatbot drew a 14-year-old boy, Sewell Setzer III, into an emotionally and sexually exploitative relationship before his suicide. The states wrote that they had tried to negotiate terms with the company but “could not reach agreement” before it filed. Kentucky is the only state to have sued, the filing says.
The company has not conceded wrongdoing. In a message to users, it said that “maintaining a safe and engaging experience for our community remains a top priority,” that its privacy and security practices “are unchanged,” and that users can still delete their accounts or export their data.
A test for California’s new chatbot law
The bankruptcy arrives weeks after Gov. Gavin Newsom signed Senate Bill 1119, known as Adam’s Law, on Sept. 10. The measure, carried by Senator Steve Padilla of San Diego with Assemblymembers Buffy Wicks of Oakland and Rebecca Bauer-Kahan of Orinda, requires companion-chatbot operators to maintain crisis protocols, offer parental controls, conduct annual risk assessments and submit to independent child-safety audits. Mr. Bonta’s office said it takes effect in 2027.
The law will bind whoever operates the platform in California once it takes effect, but it will not govern the terms of a sale that could close by mid-December. The states’ filing is, in effect, an attempt to carry those rules into the auction, so that a buyer inherits obligations rather than a clean slate.
For California, home to many of the companies building these products, the case is an early look at a problem that is likely to recur: what happens to the most intimate data an AI company collects when the company itself runs out of money. Mr. Bonta said his office “looks forward to remaining actively engaged in the bankruptcy proceedings.”
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