Justice Department’s Trustee Office seeks consumer privacy ombuds for Character.AI data sale

The Justice Department’s Executive Office for U.S. Trustees asked the U.S. Bankruptcy Court for the District of Delaware to appoint a consumer privacy ombuds to oversee any sale of Character.AI user chat data in Character Technologies, Inc.’s Chapter 11 case, filed Oct. 12, 2026.

The ombuds would advise the court on what data can be sold and under what terms, and its role is strictly advisory, meaning it may appear and be heard and inform the court but holds no veto over a sale. Under section 332 of the Bankruptcy Code, the U.S. Trustee must appoint one disinterested person as ombuds no later than seven days ahead of the hearing, and section 332 also bars that person from disclosing any personally identifiable information obtained under the Bankruptcy Code.

A sale may proceed only if it is consistent with Character’s privacy policy when that policy bars the transfer of personally identifiable information to unaffiliated parties. Otherwise, the sale can go forward after an ombuds is appointed, and the court finds that no legal violation was shown. The states have proposed nine conditions, including age assurance beyond self-declared birthdates, protections for minors, and the removal of chatbots posing as licensed professionals. Additional conditions cover crisis safeguards, a privacy program, account-level ad opt-outs, limits on secondary use, a pre-sale data deletion window, and truthful marketing.

Character tells the court it is a superintelligence entertainment platform with immersive, multimodal experiences built around fictional or imagined characters, according to the U.S. Trustee’s filing. Its chatbot characters imitate human conversation and relationships, with some posing as psychologists, therapists, and doctors. The company reports about 12 million active monthly users worldwide, while its first-day filings list current and past platform users at about 163 million. More than 21.6 million U.S. accounts had been created by March 13, 2025, and more than 2.1 million had a declared age under 18.

The company’s servers contain account details, chat text and audio, behavioral information, device identifiers, and payment records. The platform has gathered sensitive consumer information through chats, including private talks about mental health, relationships, and emotional difficulties. Several states, including Wisconsin, opened investigations into Character.AI after a wrongful death lawsuit filed in 2024, and their review found possible consumer protection and privacy violations.

Character.AI took voluntary steps to restrict minors’ access to certain chatbot features, but the states said the measures are incomplete and not compulsory. Kentucky sued Character and its co-founders on January 8, 2026, in Franklin Circuit Court, and Texas opened investigations into Character.AI and Meta AI Studio over children’s privacy in August 2025. The FTC ordered seven AI chatbot companies, including Character Technologies, to report on child safety in September 2025.

At least seven families of users who died by suicide or suffered mental health harms allegedly due to Character’s chatbot have sued the firm. Sewell Setzer III died by suicide on February 28, 2024, at age 14 after about a year messaging chatbots modeled on Game of Thrones characters, and his mother, Megan Garcia, filed a wrongful death lawsuit in October 2024. Testing by Common Sense Media with Stanford’s Brainstorm Lab rated the platform an unacceptable risk for teens and children.

The company dates its founding to 2021, when Noam Shazeer and De Freitas, both former Google researchers, started it, and Shazeer co-wrote the 2017 paper “Attention Is All You Need.” Google struck a $2.7 billion licensing agreement in mid-2024 and brought back Shazeer, De Freitas, and some of the research team. Following that agreement, Character halted work on advanced models, relied on older technology, confronted growing legal liability over harm to minors, and failed to produce enough revenue.

Character is burning $8 million to $9 million a month and has warned it cannot fund a much longer process, while its advertising revenue hit roughly $2.5 million in August 2026, amounting to nearly half of monthly revenue, according to the chief executive’s declaration. The company listed estimated assets and liabilities of between $50 million and $100 million, down from a prior valuation once cited at $2.5 billion.

The Justice Department’s bankruptcy office has described Character’s privacy policy as ambiguous and said it indicates the company may sell at least some users’ chat histories, while the U.S. Trustee’s filing described the policy as opaque and cautioned that the company may disclose personally identifiable information. The company revised its privacy policy on July 1 while it was actively marketing its assets, according to the court filing, and its chatbot tells users that conversations will not be shared unless they give explicit permission. Character maintains that its policy as in force on the petition date permits the sale and transfer of user data, so it argues no ombuds is required.

Sydney Saubestre, who serves as a senior policy analyst on privacy and data at the Center for Democracy and Technology, said Character.AI’s policy permits disclosure of user data in a sale of the company or its assets. She added that a buyer can change privacy practices if consumers consent, which some might do if offered incentives. “At the very least, customers of the seller should have to opt into the sale of their data to the buyer,” Saubestre said.

A coalition of 39 state attorneys general and the District of Columbia filed a notice on Oct. 14, 2026, in Character’s Chapter 11 case, and on Oct. 29, 2026, those states joined the U.S. Trustee’s objection and said a consumer privacy ombuds is necessary. The states said an ombuds is required if Character sells or transfers any property that may contain users’ personal or sensitive information, including minors’ data. The intervention comes as personal data is increasingly treated as a salable corporate asset in bankruptcy, including Google’s $10 million purchase of Spirit Airlines’ data auction in August 2026 and the March 2025 23andMe bankruptcy case.

The case is assigned to Judge Brendan Linehan Shannon, who will decide what conditions any sale must carry. The bidding procedures hearing is set for Oct. 30, 2026, at 10 a.m. Eastern, with bids due Nov. 20, 2026, the auction on Nov. 23, and the sale hearing on Nov. 24, 2026. If an ombuds is required for the Nov. 24 sale hearing, section 332’s seven-day rule puts the appointment no later than Nov. 17, 2026.

Character said it could consent to an ombuds under appropriate circumstances because its liquidity cannot support a substantially extended process, and the company said it was in talks with the U.S. Trustee and hoped to settle the issue before the hearing. Character did not respond to a request for comment.

The states say Character’s sale motion, centered on a $20 million non-exclusive Disney license, does not make clear whether the company is also selling its full platform. Character’s Oct. 27 reply said Disney does not have access to Character’s user data, is not acquiring personally identifiable information, and should not see its agreement subject to ombuds review. The coalition’s Oct. 29 joinder, Docket No. 80, adopts in full the U.S. Trustee’s Oct. 27 objection to the sale procedures.

Wisconsin Attorney General Kaul said companies that gather sensitive personal data must protect it and must ensure adequate protections for users’ safety and privacy. Vermont Attorney General Charity Clark said Character’s voluntary restrictions on minors could be circumvented or reversed by a purchaser. The states intend to remain actively engaged in the bankruptcy proceedings and reserved rights to challenge any proposed sale or bankruptcy plan.