DotDotSmile, a children's clothing subsidiary of MLM giant LulaRoe, has filed for bankruptcy, citing more than $5 million in unpaid debts

• DotDotSmile, run by the daughter of LulaRoe creator DeAnne Brady Stidham, has filed for bankruptcy. 
• The filing says the company owes more than $5.6 million in debts. 
• Earlier this year, DotDotSmile said it would move away from the MLM model and into direct sales. 

DotDotSmile, a children's clothing subsidiary of mega multi-level marketing company LulaRoe, filed for Chapter 11 bankruptcy this week. 

According to the filing, DotDotSmile has more than $4.4 million in assets but owes more than $5.6 million in total debts. 

Among the creditors listed by the filing were unpaid bills in the amount of $123,689 to a staffing company and more than $191,915 owed to Mercedes-Benz for the purchase of a 2021 Mercedes-Benz luxury SUV. 

DotDotSmile was founded by Nicole Thompson, the daughter of Mark Stidham and DeAnne Brady Stidham. The children's clothing line was also sold alongside LuLaRoe's standard collection of adult-sized clothing. 

For years, LulaRoe was considered among the most successful multi-level marketing companies. It spawned several other spoke companies, including DotDotSmile and Honey & Lace, another clothing company. 

But in 2017, the company was hit with a class-action lawsuit claiming that LulaRoe, which at that point was raking in $2.3 billion in revenue annually, was actually a pyramid scheme. The company eventually agreed to pay a $4.75 million settlement. 

However, after the case was settled, LulaRoe faced a gauntlet of additional problems. Many sellers began complaining about the poor quality of the leggings and dresses they were sent to sell, noting that the company's products had severely declined in quality.

These grievances, combined with a change in the company's returns policy that made it nearly impossible for sellers to return or exchange damaged goods, seriously dented the company's goodwill. More than 100 LulaRoe sellers named the company in their declarations of bankruptcy. 

A smaller number of DotDotSmile sellers also cited the company in their personal bankruptcy filings. 

In 2021, DotDotSmile was dinged by the Better Business Bureau's Direct Selling Self-Regulatory Council, or DSSRC, for making deceptive earnings claims. According to the BBB, the DSSRC "determined that a number of aggressive earnings claims are being disseminated by the Company's salesforce member" that "appear unsupported."

In May of this year, following troubles with its parent company LulaRoe, the children's clothing brand informed its MLM distributors via email that it would no longer be operating as an MLM as of June 30 and would not be paying out commissions. The email said the company would instead focus on a wholesale and direct sales model.

DotDotSmile did not immediately respond to Insider's request for comment.