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.