Two years after the death of Chucky, the Play Pals Corporation, manufacturer of the Good Guy doll line, struggles to recover from the scandal surrounding the infamous incident. In a bid to reassure stockholders that there was nothing wrong with the doll, the company retrieves Chucky's remains and reassembles him. During the process, a sudden power surge fatally electrocutes one of the assembly line workers, and the doll is unexpectedly brought back to life. The company's CEO, Mr. Sullivan, wastes no time in ordering his assistant Mattson to dispose of the doll, hoping to bury the issue and safeguard the brand.
Eight-year-old Andy Barclay, who has spent years in foster care after his mother Karen Barclay was institutionalized for insisting the doll was alive, is placed with foster parents Phil Simpson and Joanne Simpson. Andy soon meets Kyle, a cynical and street-smart teenage girl the Simpsons are also fostering. Chucky discovers Andy's whereabouts by using Mattson's car phone to contact Grace Poole, the manager of Andy's foster center, before suffocating Mattson with a plastic bag and cutting off any chance of discovery.
Chucky infiltrates the Simpsons' home and takes the place of another Good Guy doll, Tommy, which he buries in the backyard. Andy begins to bond with Kyle after the two are punished for an heirloom Chucky destroyed. That night, Chucky reveals himself to Andy, but Kyle arrives in time to stop the voodoo chant he attempts to complete in order to possess the boy. Kyle doesn’t believe Andy’s claim that the doll is alive, and Phil and Joanne storm in, blaming Kyle for the chaos; Phil hurls Chucky into the basement in frustration. As the days pass, the doll’s body begins to feel human again, and Chucky experiences a nosebleed that hints at his troubling transformation.
The next day, Chucky secretly follows Andy to school and defaces his homework, earning detention. He then kills Mrs. Kettlewell, Andy’s teacher, stabbing her with an air pump and beating her with a yardstick, before Andy manages to escape. Desperate, Andy tries to warn his foster parents, but Phil refuses to believe him and contemplates returning him to the foster center.
That night, Andy sneaks into the basement to confront Chucky, but the doll overpowers him. When Phil arrives to investigate, Chucky trips him, sending him tumbling down the stairs to his death. Joanne, blaming Andy for the accident, sends him back to the foster center. Chucky then stabs Joanne to death off screen, and Kyle discovers that the “Tommy” doll was actually Chucky’s disguise all along, realizing Andy had been telling the truth.
Chucky ambushes Kyle and forces her to drive him to the foster center. He stabs Grace to death and captures Andy. Kyle pursues them through the streets to the Play Pals factory, but cannot locate them before Chucky knocks Andy unconscious and completes his ritual. The spell fails, however, as Chucky has spent too long in the doll’s body and finds himself permanently trapped in a limbo of his own making.
The chase continues through the factory, where Chucky murders a technician and Kyle and Andy battle him with improvised factory hardware. Chucky escapes an initial assault, then returns to the fight, knocking Kyle out. Andy uses an emergency release valve to flood the area with molten plastic, seemingly killing Chucky for good. As the two heroes rescue the unconscious Kyle from a conveyor belt, they approach the half-melted form of Chucky, who unexpectedly stirs back to life.
In a final, brutal moment, Kyle shoves a high-pressure air hose into Chucky’s mouth, inflating his head until it explodes and ends his reign of terror. With the danger finally behind them, Andy and Kyle step away from the factory, unsure of what their next steps will be but relieved to be free from the doll’s grip, and determined to face whatever comes next together.
