The previous 'Child's Play' film ended with Nica being arrested for Chucky killing her family; Nica's niece Alice in Chucky's clutches; Tiffany (still possessing the body of actress Jennifer Tilly) subsequently mailing Chucky to a now-adult Andy Barclay (the protagonist in the first three films); and Andy shooting Chucky when the package arrives.
Jumping ahead a few years, Andy (Alex Vincent) is on a date. His date looked up his past online and, creeped out by it, leaves early. Andy returns home and, from a safe, removes the decapitated but still alive head of Chucky (voiced by Brad Dourif). This is the scar-headed version from Bride through Curse of Chucky (Scar-Chucky). The pair banter for a bit, and then Andy takes out a blow torch and begins torturing his nemesis with it.
Meanwhile, Nica (Fiona Dourif) is receiving electro-shock therapy in a mental hospital. She was deemed insane and committed after trial for the events in the first film. She speaks with her psychologist, Dr. Foley (Michael Terriault). Dr. Foley notes that Nica has made a lot of progress in recognizing that she, not Chucky, killed her family. He has her transferred to a low-security institution. There, she meets fellow inmates Malcolm (who suffers from multiple personality disorder), Angela (schizophrenia), Madeleine (murdered her child), and Claire (anger issues and pyromania). Things go well at first. She and Malcom have sex and she begins group therapy. At one group session, Dr. Foley brings out a "Good Guy" doll he bought from Hot Topic. Nica looks shaken, but claims the doll is not real. Angela says Chucky called her on the phone and said he was going to murder them all. Madeleine then adopts the doll as her new "baby" (Baby-Chucky). Later that day, Tiffany (Jennifer Tilly) shows up to speak with Nica. She states that she was Alice's guardian until Alice's recent death... of a broken heart. Nica is devastated to learn that Alice is dead and blames herself. Tiffany then leaves Nica with another Good Guy doll that Alice allegedly used during therapy.
That night, one of the Chucky dolls (it is not revealed which one) steals a scalpel and walks down the hallway to Nica's room. He sees Angela, who believes she is hallucinating (Chucky also admits he had called Angela on the phone). Chucky promises to kill her next. Chucky enters Nica's room... and sees blood pooling on the floor. Chucky realizes Nica ripped one of the spokes off her wheelchair and slit her writs out of guilt over what happened to Alice. Nica awakens the next day to see her arm sewn up (in a manner similar to Scar-Chucky's face) and Chucky having written "not so fast" in the pool of blood. Nica then hears screaming and sees that Chucky had slit Angela's wrist with the wheelchair wire and killed her instead.
At group therapy, Nica immediately drops the act and begins arguing that Chucky murdered Angela. To prove that Chucky isn't real, Dr. Foley uses a lighter to melt the hand of the Chucky doll given to her by Tiffany into a shape resembling a claw (Claw-Chucky). Presumably, were Chucky alive, he would have screamed in pain. When Nica demands he do the same thing to Baby-Chucky, Madeine flees the room with her "baby." Malcolm believes Nica and the pair begin following Madeleine. Malcolm goes outside where Madeleine fled to confront her. Watching from the window as there is no handicap access to the backyard, Nica sees Baby-Chucky move and flip her off. During a confrontation, Baby-Chucky and Malcolm fall into an open grave (apparently, the institution buries patients like Angela on-site). When they emerge, Malcolm gives Nica an evil smile and begins referring to himself as "Charles" (Chucky's human name had been Charles Lee Ray). This hints at the idea that Chucky is now possessing Malcolm. Meanwhile, Claire goes to throw Claw-Chucky in the trash when he comes to life and bites her. She freaks out and Dr. Foley and an orderly forcibly strap her to a bed before leaving the room to attend to another emergency. Claw-Chucky kills Claire by shooting an oxygen tank through the skylight above her, with the falling glass impaling and decapitating Claire.
Andy hears of the murders, grabs a Chucky doll he had given a military haircut to (referencing the events of Child's Play 3), and begins driving to the institution. He receives a call from Tiffany (who admits she is still in Jennifer Tilly's body - i.e., the actress Jennifer Tilly is a character in this series) who taunts him. She also references there are "three of them" in a cult.
Dr. Foley wheels Nica into his office where he hypnotizes her. Once she is hypnotized, it becomes clear that Dr. Foley has done this before and uses these opportunities to brainwash and rape Nica. He tells Nica that she is responsible for the deaths of Angela and Claire. He begins to kiss Nica when one of the Chuckys smashes him on the head with a glass bottle. Chucky admits that he doesn't know whether to kill Dr. Foley or commend him for being so twisted. He tries to convince Nica to kill Dr. Foley, but she doesn't. She then has a dream where she is taunted by Alice and attacked by a giant-sized Chucky. When Nica awakens, Dr. Foley claims that Nica was the one who attacked him.
A little later, Dr. Foley receives the military haircut Good Guy doll (haircut-Chucky) in the mail. Andy shows up and demands to be committed, fighting the guards until they lock him in a rubber room. Madeleine seemingly has a breakthrough with the Baby Chucky and they bury the doll in the cemetery. Unsure how she will react having acknowledged that she killed her real child, Dr. Foley puts Madeleine on suicide watch. But Baby Chucky arises from his grave, crawls in through Madeleine's window, and kills her (with her consent) by ripping out her tongue. He then makes it look like a suicide. Dr. Foley returns to his office to find Nica there (she had been drugged by Claw-Chucky). Dr. Foley tells her he is going to pin the new deaths on her and write a book on her murders. He then puts Nica in high heels (he has a foot fetish) and begins molesting her when he is again knocked out by both Chucky dolls. Claw-Chucky explains that he learned a new voodoo spell that allows him to split his soul across multiple bodies. Chucky explains that he successfully possessed Alice and went on a killing spree in Alice's body. But one of Alice's victims fought back and killed her, thus forcing him back into the doll bodies. The two Chuckies then bring haircut-Chucky to life. The trio kill an orderly that walked in on them. Meanwhile, Tiffany pulls up outside the institution and slits the guard's throat. We see she has the doll her soul used to inhabit in the back seat.
The Chuckys come up with a plan. Baby-Chucky goes off to tie up loose ends (killing a nurse and, eventually, Malcolm, who had never actually been possessed). Claw-Chucky successfully possesses Nica and in so doing, is able to allow her to walk again. Nica/Chucky gets out of her wheelchair and stomps Dr. Foley's head in with her high heels. Haircut-Chucky tries to kill Andy, but is overpowered by him. Andy rips open Haircut-Chucky's stomach and pulls out a gun he had hidden inside (he mailed the doll to Dr. Foley to smuggle the weapon inside the institution). Andy and Haircut-Chucky fight and Andy shoots the doll to death. Andy turns around and sees Nica/Chucky standing in the doorway. Nica/Chucky taunts Andy, saying he doesn't have the guts to sacrifice Nica to kill him. Andy does have the guts and tries to shoot Nica/Chucky, but is out of bullets. Nica/Chucky locks Andy into the rubber room (ostensibly the police will pin all the murders on Andy as he is the only one left alive and is in a cell with a gun and a bloody Chucky doll corpse). Nica/Chucky walks out of the institution as Baby-Chucky stays behind to keep an eye on Andy.
Nica/Chucky walks up to Tiffany's car and the two make out. They get into the car, where Tiffany says she misses Alice. The two then burst into laughter at that comment... as does the Tiffany doll sitting in the back seat (this suggests that Tiffany may have also split her soul between the doll and Jennifer Tilly. It could also mean that the Tiffany doll houses Alice's soul, or perhaps Glen/Glenda's soul(s) as their fates remain unresolved). The three then drive off into the night as the police arrive.
In a post-credits scene (in the DVD/Blu ray version only), the front door to Andy's house is opened. Scar-Chucky looks over and exclaims "Kyle!" (Christine Elise - Andy's foster sister from the second Chucky film). Kyle walks in and begins torturing the head of Scar-Chucky (and ostensibly, is the last hope for defeating the now-victorious cult of Chucky).