Business SystemsGuide

Character.AI Filed for Bankruptcy. Its Users' Chats Are Now Part of the Sale Question. Six Things to Check With Your Own AI Vendors.

Most businesses read an AI tool's privacy policy as a promise about today. It is also a description of what happens to your data if the company is sold, merged or wound down. In a young industry, that is not a remote possibility.

Author

DueClix Engineering

Published

Reading time

4 min read

On 12 October Character.AI, the AI companion chatbot company, filed for Chapter 11 bankruptcy. Its chief executive, Colin Adams, pointed to "significant legal, regulatory and operational headwinds", and the filing cited high costs and possible liabilities from lawsuits. A Disney subsidiary has offered $20 million for a non-exclusive licence to some of the company's intellectual property. The service is still running and the sale is expected to close in late November or early December.

The part that matters for everyone else is what happens to the conversations.

What the privacy policy actually allows

Character.AI told users their information "continues to be protected under our Privacy Policy." That policy also says user information, including chat transcripts, voice recordings, images and videos, can be disclosed in connection with a sale of company assets. A sale of company assets is exactly what is now under way. Reports say no buyer has yet come forward for the platform itself or its user data.

Attorneys general from 40 states have filed a notice in the case asking that any buyer protect users' chat histories. The states could ask for an independent consumer privacy ombudsman or object to the sale terms. One filing also says the company does not treat its users as creditors entitled to notice of the case.

Why a business should care about a companion chatbot

Character.AI is a consumer app. But think about what your team types into AI tools in a normal week: customer names and emails pasted into a chatbot to draft a reply, a contract uploaded for a summary, a spreadsheet of invoices sent for analysis, call recordings sent for notes. Each of those now sits with a vendor, under that vendor's policy, for as long as that vendor keeps it.

Many AI vendors are young, spend heavily and depend on the next funding round. Some will be bought, some will merge and some will close. That is not a prediction about any one company. It is what usually happens in a new market. The question for a business is not whether its AI vendor is trustworthy today. It is where the data goes if the vendor changes hands.

Six things to check with every AI vendor you use

  1. Find the "business transfer" clause. Search the privacy policy for "merger", "acquisition", "sale of assets" or "business transfer". If it says your data can move to a buyer, assume that it will.
  2. Use the business plan, not the personal one, for customer data. Business and API plans from the larger AI providers usually come with a data processing agreement, shorter retention and no use of your data for training. Personal accounts often do not. Check the terms of the plan you are actually on.
  3. Find out how long they keep what you send. Some services keep chats until you delete them, some for 30 days, some can be set to keep nothing. Shorter is better. Data that no longer exists cannot be sold.
  4. Export your work now, and on a schedule. The prompts that work, the instructions your assistant follows, the documents in its knowledge base, any workflow you built inside the tool. If you cannot export them in a usable format, you do not really own them. A quarterly export takes minutes.
  5. Delete what you no longer need, and check that deleting works. Old chats, test uploads, accounts of staff who left. Character.AI's users can still export and delete their data. That option is worth using on any service before it changes hands, not after.
  6. Keep the important parts in your own systems. Customer records, the source documents and the final outputs belong in your own storage. The AI tool should be a step in the process, not the only place the work exists. Then a vendor closing is an inconvenience, not a loss.

One rule that covers most of it

Before anyone on your team pastes something into an AI tool, ask one question: would we be comfortable if a company we have never heard of owned this next year? If the answer is no, it belongs in a tool with a business agreement and short retention, or it does not go in at all. We wrote more about what a small business can safely hand to AI, and about which parts of an AI stack we keep ourselves.

This is not legal advice. If you handle health, financial or children's data, the rules that apply to you are stricter than anything here, and a short conversation with a lawyer is worth having before you choose a vendor.

Sources

Written by

DueClix EngineeringEngineering team

The team that designs and builds DueClix systems. We write about the parts of the work that are worth writing down.

Have a process worth improving?

Let's build the system behind it. Tell us what the process is and where it breaks — the first conversation is about constraints, not technology.

Start a projectFixed-price checks