Six weeks later, back in New York, the social circle attends the funeral of Mrs. Peniston, who died suddenly. Her will declares that most of her estate be left to Jack Stepney, her already-wealthy nephew. Lily is snubbed, receiving only $10,000, while the remainder of the estate is left to Grace Stepney. Lily, despite feeling cheated, is happy overall because the money will pay off virtually all her debt to Gus Trenor. She learns, however, that she will not be able to receive the money for a whole year, meaning that she will remain destitute for quite some time. Meanwhile, other people in the community gossip that Lily was likely snubbed when Mrs. Peniston heard that she seduced George Dorset. Lily begins to fear that she will be rejected from all of society, a fear confirmed by Gerty Farish's assertion that Bertha Dorset, as a high-ranking member of society, will be held a more credible source of information than Lily. To her dismay, Lily realizes that Gerty is her only remaining friend.

We learn that after she was kicked off the yacht, Lily went to England for a short stay, but Selden convinced her to return to America. She came home to find that her reputation had been totally destroyed. It is clear that Bertha used Lily to keep George distracted, then framed Lily to get rid of her. Lily now makes it her goal to regain her social standing, although this will not be easy. One night, when she goes out to dinner with Gerty, they meet the Trenors, Carry Fisher and Simon Rosedale. They speak briefly and awkwardly, which indicates that Lily is now generally disliked after being discredited.

Meanwhile, Lily is still plagued by her financial troubles. She feels it morally necessary to repay Trenor, although she cannot do so for another year. She asks Grace to loan her money, but Grace flatly refuses, telling Lily she ought to be ashamed of herself for disgracing herself and, indirectly, Mrs. Peniston. Even Lily's own family has deserted her.

As she leaves her interview with Grace, Lily bumps into Carry Fisher, who tries to make amends with her. Carry convinces Lily to go to the Gormers' party that night, a move that proves successful because soon afterwards the Gormers invite Lily to go on vacation with them to Alaska, an invitation which Lily accepts. Her hope is to stay in Alaska until the New York socialites forgive her and miss her, a plan which partially works. Lily wins herself a place in the rising Gormer social circle, which contains some people who are also in the Dorset/Trenor social circle. Carry also encourages Lily to marry as soon as possible in order to cement her social comeback. Carry suggests George, who may get divorced from Bertha at any time, and also mentions Simon Rosedale. The latter no longer seems like a bad alternative to Lily, who is becoming desperate for security in her friends and finances.

Later on, walking around town, Lily meets George, who apologizes to her for all that has happened. He admits that he has also been outcast by society, and he needs a friend. Lily tells him that after the scandal, she can no longer be friends with him at all. George begs her to help him, saying that only she knows about the affair between Bertha and Ned Silverton, and so she can help release him from his failed marriage. However, Lily offers no help and says she can never see George again.

She returns to the Gormer house and learns that Bertha stopped by to see her in her absence. Lily suspects that Bertha is trying to spy with the intent of harming her. She resolves to spend the winter in a hotel, where she can recoup her finances and relax for a while. George comes by for a visit to plead his case once more, but again Lily refuses him. She lies, telling him that she knows nothing of Bertha and her extramarital affairs, although we know that she has Bertha's love letters to Selden. Lily asks George to never return.

Lily resolves to marry Rosedale. Carry, who has had enormous success bringing the Brys into her social world, assists by inviting both Lily and Rosedale to a party. When Lily sees Rosedale again, something about him leaves her with mixed feelings about the possibility of marriage.

With the death of Mrs. Peniston, a pattern of rejection begins to develop around Lily. First, she is kicked out of high society by Bertha. Now, she has almost been kicked out of her own family by her late aunt, who disinherited her. Grace also aids in the excommunication from the family. If Lily no longer has society or her family to fall back on, that leaves her virtually no support except from Gerty Farish, and her continual support from Selden.

At several points in the novel, Wharton doles out criticism of the society she describes. One such instance is in Chapter Four, when we learn that Bertha's story of Lily and George will be considered more believable than Lily's denial simply because Bertha is more wealthy. In the upper-crust New York society, the truth is dependent on wealth rather than factual merit. This has some very dangerous implications in terms of power; Bertha, as we will soon see more and more, has total control over Lily because she is more wealthy than her. Bertha's finances give her the means to throw Lily out of society and keep her out.

When we see at the end of Chapter Six the successful incorporation of the Brys into society by Carry, it serves as a model for how Lily's life ideally would have gone. The Brys spent much of Book One as characters who were on the borders of high society. With a little coaxing and some string-pulling from Carry, they are eventually elevated to the position of one of the ideal couples in New York. Lily, too, could rise out of the pit into which she has fallen, but sadly does not. In terms of the plot, Lily moves in opposition to the Brys; she begins the book on good terms but slowly falls, whereas the Brys only rise in prestige during the course of the book. This literary technique is known as chiasmus, or a symmetrical crossing-over.

This section ends with a dire order from Carry: Lily must marry immediately. Carry does not even care who the husband is, provided he is of reasonable stature, like Rosedale. Carry orders Lily to do so because Carry recognizes that Lily is no longer part of a family or a social sphere, which leaves her floating with no real roots. A husband is the only way for Lily to regain a place in society and financial stability. Thus, the importance of marriage has changed for Lily. At the beginning of the book, a marriage to a rich, respected man would cement her place in society; it would give her a boost into the upper levels. Now, Lily is desperately trying to find a husband merely to survive and perhaps to get a foot in society's door once again. This is an indicator of how her position has worsened substantially.