In 1999, ten years have passed since the fifth film; Alice Johnson and her son Jacob have moved away from Springwood, and Freddy Krueger has returned and succeeded in killing nearly all of the children in the town of Springwood, Ohio. The only surviving teenager, known only as "John Doe", finds himself confronted by Freddy in a dream and is knocked past the town of Springwood's city limits by Freddy. The city limits serve as a barrier that Freddy cannot cross, and the hole John makes when he goes through the barrier closes as soon as Freddy touches it. However, when John goes through the barrier, he hits his head on a rock and does not remember who he is or why he is outside of Springwood.
Meanwhile, at a shelter for troubled youth, Spencer, Carlos and Tracy plot to run away from the shelter. Carlos was physically abused by his parents, resulting in a hearing disability, Tracy was sexually abused by her father, and Spencer simply does not want to conform to his father's overbearing lifestyle. John, after being picked up by the police, becomes a resident of the shelter and a patient of Dr. Maggie Burroughs. Maggie notices a newspaper clipping in John's pocket from Springwood. In an effort to cure John's amnesia, she decides it would be best to go on a road trip to Springwood to jog his memory. Tracy, Carlos, and Spencer stow away in the van in their effort to escape the shelter, but are discovered when John has a hallucination and almost wrecks the van just outside Springwood.
Tracy, Spencer, and Carlos, after unsuccessfully trying to leave Springwood, decide to rest at a nearby abandoned house, which transforms into 1428 Elm Street (Nancy Thompson's/Jesse Walsh's former home). Meanwhile, John and Maggie visit Springwood Orphanage and discover that Freddy had a child. John believes he is the child because Freddy allowed him to live. Back on Elm Street, Carlos and Spencer fall asleep and become prey to Freddy. Tracy is awakened by Maggie, but John, who went into the dream world with Tracy to try to help Spencer, is still asleep. Maggie and Tracy decide to take him back to the shelter. However, on their way back, Krueger kills John in his dream, but not before revealing that Krueger's kid is a girl. As John dies, he reveals this information to Maggie. Tracy and Maggie return to the shelter, but they discover that no one remembers John, Spencer, or Carlos except for Doc, who has learned to control his dreams. Maggie remembers what John told her and discovers her own adoption papers, learning that she is Freddy's daughter.
Doc discovers Freddy's power comes from the "dream demons" who continually revive him, and that Freddy can be killed if he's pulled into the real world. Maggie decides that she will be the one to enter Freddy's mind and pull him into the real world. Once in the dream world, she puts on a pair of 3-D glasses – the theatrical version of the film was in 3D during the climax – and goes into Freddy's mind. There, she finds out that Freddy was teased as a child, abused by his foster father, inflicted self-abuse as a teenager, and murdered his wife. Freddy was given the power to become immortal from fiery demons. After some struggling, Maggie manages to pull Freddy into the real world.
Maggie and Freddy end up in hand-to-hand combat against one another. While Maggie continues to battle Freddy she uses several weapons confiscated from patients at the shelter. Enraged by the knowledge of what he has done, she disarms him of his clawed glove. Eventually, Maggie stabs Freddy in the stomach with his own glove while she is close to him. Tracy then throws Maggie a pipe bomb. After she impales Freddy to a steel support beam she throws the bomb in his chest. As she runs away from the impending explosion, Freddy looks into the camera and says "Kids". after which he explodes. The three dream demons are then seen flying out of Freddy after the pipe bomb kills him, unable to revive him in the real world. Maggie then smiles at Tracy and Doc and says "Freddy's Dead".