The film opens in Los Angeles and we are introduced to Jeff Lebowski, who calls himself "The Dude." It is the early 1990s, and the Dude is buying half & half at a grocery store in his house robe. When he arrives home, he is welcomed by two men who assault him and demand money that they believe he and his wife owe to a porn magnate. The Dude insists that he doesn't have a wife and gets them to leave, but not before one of them has peed on his rug.
The Dude tells the story of what happened to him to his friends Donny and Walter at the bowling alley where they play in a league together. Walter tells the Dude he needs to get the real Lebowski to pay for the rug that's been urinated on, so the Dude goes to the "real" Lebowski's home in order to be compensated. Lebowski, a disabled millionaire, doesn't see that as his issue to deal with and he dismisses Dude, who steals one of Lebowski's rugs on his way out. The Dude also meets Lebowski's much younger wife, Bunny, a nymphomaniac, on the way out.
Soon afterwards, Lebowski contacts the Dude to tell him that Bunny has been kidnapped and that he wants the Dude to be the one to deliver a briefcase with her million-dollar ransom to the kidnappers. Soon after that, the Dude is again assaulted at his home by two different men, who take his newly acquired rug. Walter, a Vietnam veteran, tells the Dude that he is going to help him with the money drop and has an idea to leave the kidnappers with a briefcase of dirty underwear instead of the money, so they can keep the million for themselves. Against the Dude's wishes, Walter throws the ringer out the car window rather than the briefcase with the ransom money, and they go to the bowling alley. That same night, the Dude's car is stolen, with the ransom money inside. Making matters even more complicated, Lebowski's daughter, Maude, a conceptual artist, calls the Dude and tells him she is the one who took his rug. She tells the Dude that Lebowski took money from the savings account of a foundation that she and her father run jointly, and she wants Lebowski to retrieve it.
Later, Lebowski shows the Dude a human toe, apparently Bunny's, that's been delivered to him. That night, a group of German nihilists, including a man named Uli, with whom Bunny appeared in a pornographic film, break into the Dude's house and threaten to castrate him if he cannot produce the money. The Dude is contacted by the police, who tell him that his car was found, but the briefcase is not there.
In the car, the Dude finds a homework assignment done by a young man named Larry. The Dude and Walter go to Larry's home and threaten him, demanding the money back. Walter shatters a red sports car on the street with a crowbar, only to find out it's the neighbor's car. Next, the Dude is brought to the house of the porn magnate, Jackie Treehorn, who wants to know where Bunny is as she owes him money. Jackie Treehorn drugs the Dude, who wakes up in a Malibu police office, where he is questioned and beaten, forbidden from ever returning to Malibu.
The Dude comes home to find his home has been ransacked. Maude is also there waiting for him, and the two of them sleep together. Afterwards she tells him she hopes to conceive a child, and was using him for that purpose. She then reveals that her mother has all the money and her father has none, which leads the Dude to piece together the entire plot. It was a ruse put together by Lebowski in an attempt to embezzle money from his foundation, in the hopes that Bunny would indeed be killed.
The Dude, Walter, and Donny decide to go bowling and are once again confronted by the nihilists who demand the ransom money. This time Walter beats them up, but Donny has a heart attack and dies in the midst of the fight. The Dude and Walter scatter Donny's ashes.
