The film opens with a woman walking her dog down a empty, darkened city street. As she passes by a manhole, she is attacked by a creature, and the dog is pulled in after her.
George Cooper (John Heard) lives with his girlfriend Lauren (Kim Greist). George, a once-prominent fashion photographer, has since forgone the fame and fortune. His current project is photographing New York City's homeless population, specifically those known as "undergrounders", or people who reside within the bowels of the city. Lauren is a current fashion model who met George during one of his photo jobs.
A police captain named Bosch (Christopher Curry) is introduced. Bosch has a personal interest in the recent flood of missing persons (most of whom are homeless) being reported to his precinct. Bosch interviews A.J. "The Reverend" Shepherd (Daniel Stern), who runs the local homeless shelter and soup kitchen. Shepherd believes recent events to be a part of a massive government cover-up and has the evidence to prove it which include an NRC radiation detector and a boot which is part of an anti-contamination crewperson.
Bosch's superiors know more than they are letting on and seem to be taking their cues from an overly glib, weasely type named Wilson (George Martin), who works for the Nuclear Regulatory Commission.
It turns out there are monsters lurking beneath the streets; beings that were once human, but radioactive, chemical toxic waste has mutated them into hideous, flesh-eating creatures that prey on the homeless who live in the underground. Given the recent drop in the underground transient population, the creatures have resorted to coming to the surface through sewer manholes at night in order to feed.
When Wilson sends a EPA crew to clean up part of the sewer, Bosch has a group of policemen armed with flamethrowers escort them. Watching through a video camera one of the EPA men has, they encounter an unknown number of the creatures and the video is suddenly cut off.
Next, Bosch, Wilson and their associates view a dead creature that was found and Wilson admits that a top-secret goverment file that he has, titled 'C.H.U.D.' that the creatures stand for Cannibalistic Humanoid Underground Dweller, the former homeless people infected by nuclear radiation. Captain Bosch argues with Wilson over how to best deal with the threat: Wilson wants to seal the sewers, open up some methane gas lines, and asphyxiate the C.H.U.D.s, despite the inherent danger to the city that the poison gas could drive the creatures to the surface.
Through a series of events, both George and A.J. Shepherd find themselves trapped in the sewers. George goes down with a local reporter (who gets eaten). Because of the secret that Wilson and his unseen superiors guard, it leads to the extent of having a mysterious and threatening lackey disrupt A.J. from making phone calls to the press. This thug then locks A.J. in an underground access tunnel. George and A.J. later find each other and attempt to escape from the sewers while evading the creatures.
Meanwhile, Lauren is alone in her apartment waiting for George to return when she deals with a clogged shower drain which splurts up blood. Next, a creature comes up through the sewer access point that Lauren unfortunately decided to open in the basement of her apartment building. The so-called CHUD creature kills two policemen who investigate noises in the building. The creature breaks into Lauren's apartment, only to be dispatched when she decapitates it with a sword.
Next, a group of the creatures (more then four are never shown on screen) attack a local diner and apparently kill everyone there. Because of the media coverage of the massacre, Wilson decides to take charge the start the flooding of the sewers with gas. When Lauren sees this announcement on her TV set, she sets out to find George, having previously told him that she is pregnant. She takes the murdered policemens car and races off to find help.
Through the dangerous investigative efforts of both A.J. and George, the absolute horror is revealed. They find crates of nuclear and radioactive waste in an area which is the CHUD's dwelling place. Seeing the boxes marked 'C.H.U.D.' they realizes that CHUD actually stands for 'Contamination Hazard Urban Disposal.' The Nuclear Regulatory Commission is directly involved in the slaughter that has been going on. Although the political bureaucracy has forbidden the NRC to transport the toxic wastes through New York because of the large-scale danger to the public, it has secretly been hiding the waste by-products beneath Manhattan in abandoned subway tunnels. Unfortunately, the underground homeless population has been coming into contact with these by-products, turning them into the mutated creatures.
George and A.J. find the remains of the dead EPA and police crew and use the video camera to call for help and they inform Bosch about what they found. With Wilson already starting the gas flow to kill the creatures, Bosch attempts to save the two men, only for Wilson to stop him. Bosch reveals that he knows all about the goverment cover-up and of the real abreviation for CHUD. Wilson pulls out a gun, intending to kill Bosch to protect his secret, but Bosch overpowers him and takes the keys to a delivery truck blocking a manhole cover to let George and A.J. out. But just when Bosch drives the truck off the manhole cover, Wilson appears and shoots him. Wilson then comandeers the truck to run over and kill George and A.J. However, Lauren also comes upon the scene and attempts to help them escape. A.J. takes Bosch's gun and shoots at Wilson as he drives the truck, fataly wounding him. The truck hits the open manhole and it explodes due to the methane gas pouring out of the sewer. George and Lauren embrace, happy to be reunited, while A.J. is releaved that Bosch, despite being shot through the chest, is still alive as he stands near the remains of the burning truck.