The film is set six months after the events of the previous last film; Tiffany (Jennifer Tilly), a former girlfriend and follower of serial killer Charles Lee Ray (voice of Brad Dourif), acquires the remains of Chucky (who was chopped up at the end of the previous film) from a police evidence locker after bribing and then murdering a police officer with access to the locker. Believing Ray's soul to still be inhabiting the doll, Tiffany crudely stitches Chucky back together and reenacts the voodoo ritual which instilled Ray inside the doll a decade ago.
Though her chants initially fail to produce results, Chucky unexpectedly springs to life and kills Tiffany's admirer, Damien (Alexis Arquette), while Tiffany watches with excitement. Tiffany and Chucky then get into an argument because Tiffany believed Chucky wished to marry her. Upon learning he had no intention of doing so, Tiffany throws him in a playpen she built for a nursery and locks him in it. She then later gives him another doll in a wedding dress with a real diamond ring to mock him. While Tiffany is watching TV during a bath, Chucky escapes the play pen and kills her by pushing the TV into the bath, electrocuting her. Then, using the same voodoo spell, Chucky gains further revenge against Tiffany by transferring her soul into the bride doll so she could feel what Chucky went through as a living doll. Chucky, who is still intent on becoming human again, concocts a plan with Tiffany to retrieve an amulet that was buried with Ray's body and use the bodies of Tiffany's neighbor Jesse (Nick Stabile) and his girlfriend Jade (Katherine Heigl) as a means to return to their human bodies.
Tiffany changes to look like a miniature version of her human form. Tiffany sends Jesse a message asking him to take the two dolls to New Jersey in exchange for cash. Jesse convinces Jade to go with him and helps her pack. Meanwhile, Jade's police officer uncle Warren (John Ritter), who dislikes Jesse, breaks into his car and plants a bag of marijuana there to frame him. Fearing this will ruin their plans, Chucky and Tiffany up an car airbag to launch nails into Warren's face. Satisfied that they have killed him, the dolls hide Warren under the backseat. Jesse and Jade return and begin their trip.
Outside a convenience store, they are pulled over by Officer Norton, who asks to search Jesse's car for the planted drugs. After he finds it, he goes to his car to report to Warren. During this time, Chucky crawls over and shoves a cloth into Norton's gas tank and lights it. Norton is killed when his car explodes and, seeing the explosion, Jesse and Jade flee the scene. Soon, they stop at a wedding chapel/hotel and are married. During that time, Warren, still alive, tries to run away but is stabbed numerous times in the back by Chucky. While in the hotel, Jesse and Jade meet a con artist, couple Russ and Diane (James Gallanders and Janet Kidder) who steal Jesse's money. As the criminals have sex in their room, Tiffany, who witnessed them take Jesse's money and speak of how the woman "doesn't deserve to wear that ring", takes their bottle of champagne and throws it into the mirrored ceiling, sending down shards of glass and killing the two con-artists. Impressed at what she just did, Chucky reveals his true feelings for Tiffany, and then proposes to her. After accepting and putting on the ring, the Both dolls have sex.
The next morning, a maid (Kathy Najimy) finds the corpses of the couple and Jesse and Jade drive away with their best friend David, who knew about their plan to elope and heard about the recent murders. He reveals that Jesse and Jade have been blamed for all of the deaths. While searching for the source of a foul smell, David finds Warren's body and demands that Jesse pull over. While he is confronting them, the dolls come alive and hold them hostage with guns, demanding for them to keep driving. David turns and is accidentally killed by a truck, much to the horror of Jade and Jesse, who drive away with the dolls. They are then chased by a police car, which Chucky is able to shoot, forcing it off the road. The dolls reveal their plan to Jesse and Jade, and direct Jesse to drive up to a mobile home, which they acquire as a new vehicle in order to evade the police. While preparing Jade for the body-switch, Tiffany begins talking with Jade, who manages to turn Tiffany against Chucky. A fight between the two dolls ensues and Jade seizes an opportunity by kicking and locking Tiffany into an oven while Jesse pushes Chucky out the window. Chucky shoots at Jesse, causing the mobile home to run off the road and into a ditch.
Chucky finds Jade and forces her to take him to his grave site, while Jesse takes Tiffany (badly burnt from the oven, but still alive) and follows them. Coming across a medical examiner digging at the site, Chucky fatally shoots him and orders Jade to open the casket and give him the amulet. After she breaks it off his corpse's neck, she throws it to him. Jesse then appears with Tiffany and they trade hostages, but Chucky throws a knife into Jesse's back, and ties up the couple for the ritual.
Before Chucky begins the body-switching incantation, Tiffany distracts him by kissing him while pulling the knife out of his pocket, and stabs him in his back. They fight until he stabs her in the heart, and she collapses to the ground. While distracted, Jesse knocks Chucky into his grave. A private investigator arrives to see Jade pointing a gun into the hole, and is shocked to see Chucky. The investigator then watches Jade shoot Chucky several times, though Chucky yells that he will return as he always does. The investigator contacts the police, telling them that Jesse and Jade are innocent of the murders and sends the couple on their way.
While stumbling upon and investigating Tiffany's doll body, Tiffany suddenly springs to life and gives birth to a baby doll before finally dying. The baby doll seems to attack the investigator as the film ends, thus setting the scene for Seed of Chucky to begin.
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