The novel’s action starts in 1820, in a jail cell in Marseille where two prisoners named Cavalletto and Rigaud encounter each other. Not far away, a group of English travelers cross paths as they wait in quarantine. The group includes Arthur Clennam, a man of 40 who is returning home after 20 years in China, the Meagles family (husband, wife, their beautiful daughter Pet, and Tattycoram, an orphan who was adopted to be Pet's companion), and Miss Wade, a mysterious and reserved woman who is travelling alone. After parting from the group, Arthur arrives in London and reunites with his mother who is cold and severe towards him. Arthur is happy to see Affery, a servant he remembers fondly, but is ill at ease with her husband, Jeremiah Flintwinch, an employee of the family business who now seems to work closely with his mother. Arthur's questions about the business and whether anything unethical has ever been done lead to an estrangement with his mother, who cuts him off from working for the company.
Arthur's homecoming introduces him to a young woman named Amy "Little" Dorrit, who works at his mother's house sewing. She is the daughter of Mr. Dorrit, who was taken to Marshalsea, a debtor’s prison. When Mr. Dorrit was imprisoned, he was married, with two children and expecting another child. His family followed him and the whole family ended up living in the prison. Mr. Dorrit’s wife gave birth to a daughter while in prison but she died soon after. The rest of the family gets used to life in prison and Mr. Dorrit becomes the longest-serving prisoner in Marshalsea. Little Dorrit makes sure that her brother and sister get some form of education while she learns to sew and embroider. Fanny, Little Dorrit’s sister, becomes a dancer and moves in with her uncle, Frederick, who is a clarinet player. Meanwhile, Tip, Little Dorrit’s brother, accumulates a large debt of his own and returns to the prison.
Intrigued by the young woman, Arthur starts to follow her and ends up learning about her family history, as well as meeting the other Dorrit family members at Marshalsea. It is obvious to Arthur that the rest of the family are pretentious and ridiculous, since they put on social airs, and Arthur starts to feel protective of Little Dorrit, realizing that her family is exploiting her. Amy is gentle and nurturing, caring for all of her family members as well as a woman named Maggy who is developmentally delayed. In an effort to help her, Arthur goes to the Circumlocution Office (a government department dominated by people from the Barnacle family) to investigate her father's debt. He is frustrated that he gets nowhere but he does re-encounter Mr. Meagles, as well an inventor named Daniel Doyce. Doyce introduces Arthur to the residents of Bleeding Heart Yard, a working-class neighborhood, where Arthur befriends the Plornish family. Rent in the neighborhood is collected by a man named Pancks, who has a reputation for being very harsh, and it turns out that Pancks is employed by the landlord, Mr. Casby, who is the father of Arthur's former fiancée Flora. Flora is now widowed, and although Arthur is initially curious, he finds the older version of her off-putting. Eventually, Arthur enters into business with Doyce.
Meanwhile, Rigaud (now going by the name of Lagnier) and Cavalletto's paths cross again, and Cavalletto flees to avoid getting stuck working for a man he mistrusts and is afraid of. He heads to London, where he is injured in an accident, and Arthur Clennam helps him, eventually helping him to secure lodgings in Bleeding Heart Yard. Little Dorrit is developing romantic feelings for Arthur, but he thinks of her only as a child and is falling in love with Pet Meagles instead. However, Arthur is disappointed to learn that Pet is already in love with a man named Henry Gowan, a spoiled artist. About this time, Amy also learns that her sister Fanny has been courted by a man named Edmund Sparkler, who is the stepson of the famously wealthy businessman Mr. Merdle, and she has been paid off by his mother to stop seeing him. Meanwhile, Tattycoram has gotten fed up with watching Pet be pampered and adored, and runs off to live with Miss Wade, despite Arthur and Mr. Meagles's efforts to persuade her to return. Little Dorrit eventually begins working for Flora, and Pancks starts behaving mysteriously. Rigaud reappears in London, going by the name of Blandois, and starts coming to see Mrs. Clennam and Flintwinch, implying he has business with them.
Pancks finally reveals his secret: he has uncovered proof that Mr. Dorrit is actually heir to a large fortune, allowing him to pay off his debts and live as a wealthy man. The Dorrits leave prison and start spending their money. With the exception of Amy, they are very invested in maintaining their new social position and hiding any evidence of the time spent in prison. Accompanied by Frederick Dorrit and Mrs. General (a woman hired to chaperone and educate the two girls), the family goes traveling abroad. In the Swiss Alps, they run into Pet and Henry, who are now married and traveling with Blandois. Amy recognizes Pet as the woman Arthur was in love with, but this only makes her more kind to her, especially since Pet's marriage does not seem to be happy. In Venice, Amy spends time becoming friends with Pet, even though both woman are scared of Blandois. In general, Amy is sad and lonely living outside of prison and trying to adjust to her new status.
Fanny, however, thrives in her new position, and when she runs into Mrs. Merdle and Edmund Sparkler in Venice, she starts flirting with him again. Now that Fanny is wealthy, Mrs. Merdle is willing to tolerate her, and she eventually gets her husband to secure her son a job in the Circumlocution Office. Fanny agrees to marry Edmund, since she wants to be wealthy and independent, and the two get married and travel back to London, accompanied by Mr. Dorrit. While visiting, Mr. Dorrit is persuaded to invest large sums of money with Merdle, but almost as soon as he gets back to Italy, he abruptly falls ill and dies. His devastated brother Frederick dies the same night.
Meanwhile, Arthur has been taking care of the Meagles's house, since they have gone to visit their daughter. This leads to him seeing Tattycoram, Miss Wade, and Blandois talking together, which alerts his suspicion. Arthur does not trust Blandois and has been trying to figure out what connection he has to Mrs. Clennam, so he keeps investigating these strange coincidences. Arthur has also, at Pancks's suggestion, invested a lot of money from his business in Merdle's scheme; Doyce is traveling abroad at this point, so he can't intervene to stop his business partner. One day, Mr. Merdle is found dead. After his death, it is found that Merdle lost a lot of money, including the money many people invested with him. Among those who invested money with Merdle was Arthur. Arthur accepts full responsibility for losing Doyce’s money so Arthur is soon arrested for debt and taken to the same prison where Dorrit was.
Once in prison, Arthur falls ill but Amy rushes to his side and nurses him. She also offers to pay off his debts, but he refuses. Arthur is concerned because while he is stuck in prison, Blandois is demanding some sort of mysterious payment from his mother. Blandois finally confronts Mrs. Clennam and reveals he knows her secret: she is not actually Arthur's mother. After she married his father, she found out that Mr. Clennam had already had a child with another woman. Mrs. Clennam chose to raise Arthur as her own and kept him apart from his birth mother until after she died. Arthur's great-uncle, who had supported Mrs. Clennam, eventually felt guilty about what happened and left money to Little Dorrit (the niece of Arthur's mother's patron) as a kind of compensation. Mrs. Clennam never gave Amy the money, although she did hire her to work at the house, and hid the document entitling her to the inheritance. Flintwinch eventually got his hands on the document and gave it to his twin brother for safekeeping, who took it to Amsterdam. Flintwinch's brother befriended Blandois, who took the document after his death and now wants to use it to blackmail Mrs. Clennam into giving him money.
Desperate to prevent Arthur from finding out the truth from Blandois, Mrs. Clennam voluntarily discloses the secret to Amy and asks her not to tell Arthur until after she is dead. The Clennam house collapses, killing Blandois, and Mrs. Clennam suffers a seizure that leaves her mute and paralyzed. With Flintwinch having fled, Amy sends Meagles to look for the copies of the document that Blandois gave to Miss Wade. Meagles ends up returning the document, which Amy later burns, and reuniting with a repentant Tattycoram. Amy also tells Arthur that she, in fact, has no money either, but fortunately Doyce returns and pays off Arthur's debts as well as giving him a job again. Arthur and Amy get married at the end of the novel, and go on to live a happy and modest life together.
