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Gabrielle Bonheur Chanel was born in 1883 to Eugénie Jeanne Devolle Chanel—known as Jeanne—a laundrywoman in the charity hospital run by the Sisters of Providence (a poorhouse) in Saumur, Maine-et-Loire, France. She was Jeanne's second child with Albert Chanel; the first, Julia, had been born less than a year earlier. Albert Chanel was an itinerant street vendor who peddled work clothes and undergarments, living a nomadic life, traveling to and from market towns. The family resided in rundown lodgings. In 1884, he married Jeanne Devolle, persuaded to do so by her family who had "united, effectively, to pay Albert.

At birth, Chanel's name was entered into the official registry as "Chasnel". Jeanne was too unwell to attend the registration, and Albert was registered as "travelling". With both parents absent, the infant's last name was misspelled, probably due to a clerical error. She went to her grave as Gabrielle Chasnel because to correct legally the misspelled name on her birth certificate would reveal that she was born in a poorhouse hospice. The couple had six children—Julia, Gabrielle, Alphonse, the first boy of the Chanel children (born 1885), Antoinette, the fourth of the Chanel children (born 1887) , Lucien, and Augustin, the sixth child who died at six months old  —and lived crowded into a one-room lodging in the town of Brive-la-Gaillarde.

When Gabrielle was 11, Jeanne died at the age of 32. The children did not attend school. Her father sent his two sons to work as farm laborers and sent his three daughters to the convent of Aubazine, which ran an orphanage. Its religious order, the Congregation of the Sacred Heart of Mary, was "founded to care for the poor and rejected, including running homes for abandoned and orphaned girls". It was a stark, frugal life, demanding strict discipline. Placement in the orphanage may have contributed to Chanel's future career, as it was where she learned to sew. At age eighteen, Chanel, too old to remain at Aubazine, went to live in a boarding house for Catholic girls in the town of Moulins.

Later in life, Chanel would retell the story of her childhood somewhat differently; she would often include more glamorous accounts, which were generally untrue. She said that when her mother died, her father sailed for America to seek his fortune, and she was sent to live with two aunts. She also claimed to have been born a decade later than 1883 and that her mother had died when she was much younger than 12.