The Justice Department wants a privacy watchdog before bankrupt Character.AI sells its users’ data

The Justice Department has told a bankruptcy court that Character.AI should not be allowed to sell its users’ conversations until an independent privacy watchdog has weighed in. The department’s Executive Office for U.S. Trustees says a consumer privacy ombudsman is needed to advise the court on what data can change hands and on what terms. The chatbot company, which is bankrupt and actively seeking to sell its assets, counts 12 million active monthly users worldwide.

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The filing turns a routine insolvency into a test of what happens to intimate text histories when a company fails. Users typed those messages into a companion-style chatbot under a privacy policy that the government now calls ambiguous. A judge can restrict the sale of that data, and the trustee’s office is asking for the information it would need to decide.

The U.S. Trustee’s request for a consumer privacy ombudsman

Suzanne Smalley of The Record reported the filing on October 30. The Executive Office for U.S. Trustees, the Justice Department unit that oversees bankruptcy administration, filed on a Tuesday and argued that an ombudsman is warranted because the sale could involve sensitive categories of information, among them minors’ data, health data and demographic data. The filing on DocumentCloud is the primary document, and The Record did not name the court or case number in its account.

According to the filing, Character.AI describes itself as a first-in-kind super intelligence entertainment platform, and its users spend an average of about two hours a day on it. Those figures help explain the government’s concern: the longer people talk to a chatbot, the more personal the stored record tends to become. Character.AI did not respond to a request for comment from The Record.

An ambiguous privacy policy and a July 1 update

The trustee’s office calls the company’s privacy policy ambiguous and says it suggests that at least some chat histories can be sold. The policy is opaque, the filing says, and it allows the company to disclose personally identifiable information in some places. It also permits transferring that information if the company is sold, which is exactly the event now in motion.

The timing drew particular attention. Character.AI updated the policy on July 1, while it was actively seeking to sell its assets, according to the filing. The Justice Department asks the company to document earlier versions of the policy, whether they disclosed transfers of personal information during a sale or reorganization, how users were notified, and whether that notice was adequate.

The filing also points to a contradiction in the product itself: the chatbot has told users their conversations will not be shared without explicit permission from the user, a promise that sits awkwardly beside a sale of the underlying logs.

Bankruptcy-sale precedent and the state attorneys general

Sydney Saubestre, a senior policy analyst for privacy and data at the Center for Democracy and Technology, told The Record that chat data can identify people even after names are removed, and that AI makes inferring sensitive traits easier. She said users agree to a privacy policy long before anyone contemplates a sale, and that agreement should not be the only protection. At the very least, she said, customers of the seller should have to opt into the sale of their data to the buyer.

Personal data has increasingly been treated as an asset in bankruptcy sales, The Record noted, including in the March 2025 23andMe case. Earlier in October, federal lawmakers criticized a pending deal between the now-defunct Spirit Airlines and Google in which Google offered $10 million for employee personal data to use for model training. A buyer is bound by the prior policy, Saubestre said, but can change practices if consumers consent, possibly with incentives.

State officials have already moved. On October 15, Michigan Attorney General Dana Nessel announced that she had joined 39 other attorneys general, including the District of Columbia, in a notice asking that protections for children and consumers survive any sale. Nessel said voluntary safety measures are not enough if a business’s next owner can reverse them, and the states reserved the right to challenge any proposed sale or plan.

Lawsuits, Chapter 11 and the sale timetable

Character.AI has faced mounting legal pressure. The Record reported that at least seven families have sued the company, alleging that users’ suicides or mental health harms were linked to the chatbot, and that the suits hastened its financial decline. A separate Record report covered Kentucky’s action over the chatbot. The implicator.ai site, summarizing the case, reported that Character Technologies filed for Chapter 11 in Delaware on October 12 and that Disney made a $20 million opening bid for a license to intellectual property, with a sale expected to close in late November or early December.

That timetable leaves little room. The same account said no one had asked the court to appoint an ombudsman as of October 13, so the Justice Department’s filing is the first formal request visible in the reporting reviewed. The next development to watch is whether the judge orders the appointment before any buyer is approved, and what that buyer is allowed to do with 12 million people’s conversations.

This article was produced with the assistance of AI and reviewed by Morning Overview editors prior to publication.

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