This film starts where the first ended. Andy is in foster care and his mother is in a mental ward due to no one believing their story about a killer doll possessed by a psychopath. The doll, Chucky, is badly mangled and back at the toy factory he came from, being repaired so the owner of the company can show it was harmless and keep his company from going under. During the repair process, Chucky comes back to life, and a repair technician is electrocuted.
The doll is put in the company owner's car, and taken along on his way home. He stops at a liquor store, allowing Chucky the opportunity to read Andy's file and call his social worker pretending to be Andy's uncle and finding the address. Once the company owner is back in the car he is told where to drive at gunpoint by the doll. They pass the foster home, and then drive to a parking lot where the man is tied up, and Chucky tries to shoot him but finds the gun is a water gun. He suffocates him with a plastic bag instead and heads to Andy's house.
Once at the house, he tries to complete the transfer ritual to send his soul into Andy's body before being stuck as a doll forever, but is interrupted by Kyle, Andy's forster sister sneaking back in the window. She tries to untie the boy and her mother walks in and accuses her of tying him up. The doll is tossed into the basement, which he promptly escapes and goes to Andy's school.
At school the next day Andy's homework has insults to the teacher written on it in crayon, by Chucky and he is blamed and held for detention. When the teacher leaves to call his foster parents, Chucky comes out of the closet and tries to kill Andy, who gets out the window and runs home. The teacher comes back, and is killed by Chucky.
When Andy arrives home he is yelled at about the call from the school, tells them Chucky did it, and the foster dad tells him Chucky was in the basement. After going to bed, Andy hears noises in the middle of the night. He gets an electric knife and heads to the basement. His foster dad comes as he is wrestling with Chucky and is killed by the doll, and blamed by his foster mom for the murder. She then packs him up and sends him back to the children's home.
Kyle is then forced to drive Chucky to the home where Andy is, and the transfer does not work. Chucky realizes he is stuck and tries to kill both of them. They escape, and end up at the toy factory being chased by Chucky. They end up killing the doll by using an air hose to make his head explode, and they leave the factory.