Character Technologies filed for Chapter 11 bankruptcy on Oct. 13, 20265. The company makes Character.AI, the app where people talk for hours with invented characters. California's companion chatbot law, Senate Bill 243, had been in force for nine and a half months1.
SB 243 told operators to warn users they were talking to software. It told them to watch for suicidal talk and act on it. Character.AI now faces a court-supervised sale5.
A policy or legal lead now owns two deadlines. One federal study has yet to publish findings after 13 months. A live bankruptcy case tests what happens to user data the law was meant to protect.
What SB 243 Already Requires
Gov. Gavin Newsom signed SB 243 on Oct. 13, 2025. It took effect Jan. 1, 202614.
The law covers any chatbot that could pass for human. An operator must tell a user, clearly, when they are talking to software rather than a person4. If the operator knows the user is a minor, it must remind them every three hours to take a break.
Operators must also publish a protocol for suicide and self-harm, and point a user in crisis toward real help14.
A person hurt by a violation can sue. SB 243 sets damages at actual losses or $1,000 per violation, whichever is larger, plus legal fees4. That private right of action is already live, nine and a half months before Adam's Law adds anything new.
Adam's Law Raises the Bar in 2027
State Sen. Steve Padilla wrote both SB 243 and its successor, Senate Bill 1119413. Newsom signed SB 1119, known as Adam's Law, on Sept. 10, 20268.
Most of Adam's Law's duties start July 1, 20278. Operators must run a safety risk check before launching a chatbot. Independent audits follow, the first due by Jan. 1, 2029 and every two years after that.
The law also requires age assurance and a parent alert after a credible and imminent threat of self-harm. It bars selling child users' personal information from the chatbot and aiming cross-context behavioral ads at them.
Public prosecutors can seek up to $5,000 per affected child for a negligent violation of Adam's Law. An intentional one can cost up to $15,000 per child8. SB 243's private damages floor is $1,000 per violation.
The FTC's Unfinished Study
Federal regulators opened their own inquiry first, on Sept. 11, 20253. It issued 6(b) orders to seven companies that run consumer chatbots built to act as companions. The list named Alphabet, Character Technologies, Instagram, Meta, OpenAI, Snap and xAI.
Character.AI's bankruptcy lands nine months after SB 243 took effect
Dated rules, letters and legal filings on AI companion chatbots, Sept. 11, 2025 to July 1, 2027
Each pin marks one dated action; the magenta pin is Character Technologies filing for bankruptcy, the moment a court took over the question the law was still answering.
Sources: California Lawyers Association [1]; Federal Trade Commission [3]; AI Compliance Atlas [4]; TechCrunch [5]; National Law Review [8]; Pennsylvania Office of Attorney General [9]; Maryland Daily Record [12]. Chart by Ryan Elliott Dennis.
The numbers behind this chart
| Date | Event |
|---|---|
| Sept. 11, 2025 | FTC orders 7 companies. FTC issues 6(b) orders to Alphabet, Character Technologies, Instagram, Meta, OpenAI, Snap and xAI |
| Oct. 13, 2025 | Newsom signs SB 243. California's companion chatbot law is signed |
| Dec. 10, 2025 | 42 AGs send a warning. A 42-state coalition demands chatbot safeguards from 13 companies |
| Jan. 1, 2026 | SB 243 takes effect. California's disclosure and self-harm duties become enforceable |
| Jan. 7, 2026 | 5 suits to settle. Character.AI and Google agree to settle suits in Florida, Colorado, New York and Texas |
| Sept. 10, 2026 | Newsom signs Adam's Law. SB 1119 adds audits, age checks and ad bans |
| Oct. 13, 2026 | Character.AI bankruptcy. Character Technologies files Chapter 11 |
| July 1, 2027 | Adam's Law duties start. Risk checks and age verification become enforceable |
FTC Chair Andrew Ferguson framed the inquiry as a dual mandate. "Protecting kids online is a top priority for the Trump-Vance FTC, and so is fostering innovation in critical sectors of our economy," he said when the orders went out3.
The commission asked how these firms measure, test and monitor harm to children and teens3. More than 13 months later, the sources checked here show zero published findings from the seven companies' answers.
A legal lead tracking this study has the commission's original announcement to read. Findings would arrive in a published report.
Character.AI's Bankruptcy Puts Chat Data at Stake
The bankruptcy filing listed assets and liabilities each between $50 million and $100 million5. CEO Colin Adams cited several pressures. "Over the past year, Character.ai has taken meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds," he said.
Those headwinds include a lawsuit from Florida mother Megan Garcia, whose 14-year-old son Sewell Setzer died by suicide. Character.AI and Google agreed to settle that case and four more on Jan. 7, 202612.
Kentucky also sued the company directly11.
Disney agreed to pay $20 million for some assets and a license to Character.AI's technology, as the opening bidder in the bankruptcy sale5. The deal also offers jobs to at least 60 employees, worth an estimated $60 million a year in pay6. Unless a bid keeps it running, the company says it will wind the platform down.
New Jersey Attorney General Jennifer Davenport announced on Oct. 15, 2026 that her state joined 39 other attorneys general in the bankruptcy case. They are calling for protections in any sale of Character.AI's business or assets. "Character.AI's chatbots have amassed vast amounts of deeply personal and sensitive conversations," she said. "That information must not be treated as a commodity to be sold to the highest bidder without meaningful safeguards"7.
Two Readings of the Same Rulebook
Pennsylvania Attorney General Dave Sunday led the push for faster rules. He led the December 2025 letter that 42 state attorneys general sent to 13 chatbot makers. It demanded safeguards and asked for commitments by Jan. 16, 20269.
"An impressionable child today already faces significant stressors as the digital world continues to expand, and such poisonous interactions rooted to chatbots must immediately cease," Sunday said9. The announcement cited a finding that 72 percent of teenagers reported interactions with an AI chatbot.
Industry groups object to the scope. Aodhan Downey, state policy manager for the Computer & Communications Industry Association, testified against SB 243 before it passed. "SB 243 casts too wide a net, applying strict rules to everyday AI tools that were never intended to act like human companions," he said10.
Downey's objection concerned SB 243's reach into everyday AI tools. Whether it applies to Adam's Law is an open question.
Other states are writing similar rules. The Future of Privacy Forum tracked 98 chatbot bills across 34 states in March 2026. Five states had enacted chatbot-specific laws in 202511.
Five States Enacted Chatbot Laws in 2025; 34 Have 2026 Bills
States enacting chatbot-specific laws in 2025 and states with tracked chatbot bills, per the Future of Privacy Forum, March 2026
Each bar counts states: the magenta bar is the five states that enacted a chatbot-specific law in 2025, the gray bar is the 34 states with 2026 bills. The groups can overlap.
Source: Future of Privacy Forum [11]. Chart by Ryan Elliott Dennis.
The numbers behind this chart
| Item | Value |
|---|---|
| Enacted a law in 2025 | 5 states |
| Have 2026 bills | 34 states |
What to Do
Map every chatbot your company runs against SB 243's test: could a reasonable user mistake it for a person4.
Put July 1, 2027 on the compliance calendar now. Most of Adam's Law's duties start then, and the first independent audit is due by Jan. 1, 2029.
Watch the Character.AI docket if your company holds similarly sensitive conversation data. The fight over that data in bankruptcy court previews how courts will treat it when a chatbot company fails.
By the numbers
- $1,000: minimum per-violation damages a user can win under SB 243's private right of action, live since Jan. 1, 20264.
- 42: attorneys general who told 13 chatbot makers to add safeguards in December 20259.
- $15,000: top penalty per child for an intentional violation of Adam's Law, once its duties start July 1, 20278.
- 7: companies the FTC ordered to answer questions on chatbot harm to kids in September 20253.
- $20 million: what Disney agreed to pay for assets and a license in Character.AI's Chapter 11 sale5.
- 40: attorneys general, New Jersey plus 39 others, in the court filing on Character.AI's sale7.
- 72 percent: share of teenagers who reported interactions with an AI chatbot, cited in the attorneys general announcement9.
- 5: states, including California, that enacted chatbot-specific laws in 2025, while 34 states had 2026 bills as of March11.
What to watch
Watch the bankruptcy sale, which Character.AI expects to close in late November or early December5. The outcome will show whether a judge sets the first real rule on a bankrupt chatbot's conversations.
The FTC's first public word on its seven-company study is also worth tracking. A report would give every other operator its clearest view yet of what the commission thinks counts as harm.
Sources
- California Lawyers Association, Privacy Law Section, "Regulatory Focus on AI Companion/Character Chatbots," California Lawyers Association, Oct. 1, 2026, https://calawyers.org/privacy-law/regulatory-focus-on-ai-companion-character-chatbots/
- Kelley Drye & Warren LLP, "AI Chatbots Face Rising Legal and Legislative Scrutiny," Ad Law Access, Sept. 15, 2026, https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ai-chatbots-face-rising-legal-and-legislative-scrutiny
- Federal Trade Commission, "FTC Launches Inquiry into AI Chatbots Acting as Companions," FTC.gov, Sept. 11, 2025, https://www.ftc.gov/news-events/news/press-releases/2025/09/ftc-launches-inquiry-ai-chatbots-acting-companions
- AI Compliance Atlas, "California SB 243 Companion Chatbot Law (2026)," AI Compliance Atlas, Sept. 20, 2026, https://aicomplianceatlas.com/law/california-sb-243
- TechCrunch staff, "Just 5 years in, interactive chatbot platform Character.AI files for bankruptcy," TechCrunch, Oct. 13, 2026, https://techcrunch.com/2026/10/13/just-5-years-in-interactive-chatbot-platform-character-ai-files-for-bankruptcy/
- TechCrunch staff, "Disney agrees to hire the majority of Character AI's workforce," TechCrunch, Oct. 18, 2026, https://techcrunch.com/2026/10/18/disney-agrees-to-hire-the-majority-of-character-ais-workforce/
- New Jersey Office of the Attorney General, "Attorney General Davenport Seeks Consumer Protections in Character.AI Bankruptcy," NJOAG, Oct. 15, 2026, https://www.njoag.gov/attorney-general-davenport-seeks-consumer-protections-in-characterai-bankruptcy/
- National Law Review staff, "California Enacts Companion Chatbot Child Safety Requirements, SB 1119," National Law Review, Sept. 18, 2026, https://natlawreview.com/article/california-enacts-companion-chatbot-child-safety-requirements
- Pennsylvania Office of Attorney General, "AG Sunday Leads Coalition of 42 Attorneys General in Letter to A.I. Software Companies," Pennsylvania Office of Attorney General, Dec. 10, 2025, https://www.attorneygeneral.gov/taking-action/ag-sunday-leads-coalition-of-42-attorneys-general-in-letter-to-a-i-software-companies-demanding-safeguards-to-protect-vulnerable-residents-from-harmful-interactions-with-bots/
- Computer & Communications Industry Association, "CCIA to Testify Against California's SB 243 on AI Chatbot Disclosures," CCIA, July 8, 2025, https://ccianet.org/news/2025/07/ccia-to-testify-against-californias-sb-243-on-ai-chatbot-disclosures-citing-legal-and-innovation-risks/
- Future of Privacy Forum, "The Chatbot Moment: Mapping the Emerging 2026 U.S. Chatbot Legislative Landscape," FPF, Mar. 12, 2026, https://fpf.org/blog/the-chatbot-moment-mapping-the-emerging-2026-u-s-chatbot-legislative-landscape/
- Maryland Daily Record staff, "Google and Character.AI chatbot lawsuit settlement over teen suicides," Maryland Daily Record, Jan. 9, 2026, https://thedailyrecord.com/2026/01/09/google-character-ai-chatbot-lawsuit-settlement-teen-suicides/
- Senate Judiciary Committee, "SB 243 (Padilla), Senate Judiciary Committee Analysis," California State Senate, April 1, 2025, https://sjud.senate.ca.gov/system/files/2025-04/sb-243-padilla-sjud-analysis.pdf