Kirsty Cotton (Ashley Laurence), the protagonist from the previous film, has been admitted to a psychiatric hospital, still haunted by visions of the unspeakable horror that destroyed her family. Interviewed by Doctor Channard (Kenneth Cranham), and his assistant, Kyle MacRae (William Hope), she tells her account of the events depicted in the first film, and pleads with them to destroy the bloody mattress her murderous stepmother, Julia Cotton (Clare Higgins) died on. Despite her frantic urging, MacRae is the only one who seems to believe her.
However, it is revealed that the obsessive Dr. Channard has been searching for the Lament Configuration, the doorway to the world of the Cenobites, for years. After hearing Kirsty's story, he has the mattress brought to his home, and has one of his more deranged patients lie on the mattress and cut himself with a straight razor. The resulting blood frees Julia from the Cenobite dimension, as it did with Frank in the first film, though Julia's physical form is immediately whole, only lacking skin due to the amount of blood.
Meanwhile, Kirsty is awakened in her room to a vision of her father, who tells her in writing that he's in Hell and to help him.
This is witnessed by MacRae, who had snuck inside Dr. Channard's house to investigate Kirsty's claims. He returns to Kirsty to tell her, and the two decide to return to Dr. Channard's house, so Kirsty can attempt to save her father who she believes is still trapped in Hell. They also decide to bring a young patient named Tiffany (Imogen Boorman), whom Kirsty has befriended. Tiffany, who hasn't spoken for years, demonstrates an amazing aptitude for puzzles.
Meanwhile, Dr. Channard, seduced by Julia, has surreptitiously brought more mentally ill patients to his home for her to feed on. When Kirsty and the others arrive at Channard's home, MacRae heads to the attic, and discovers the grisly remains of their bodies. Julia, her skin almost completely regenerated, appears and kills him, consuming his essence and completing her skin regeneration. Kirsty hears the commotion and rushes up to the attic, and walks in on the scene. Enraged, she attacks Julia, but is knocked unconscious.
Using Tiffany as a proxy, Channard and Julia unlock the Lament Configuration puzzle box and enter the world of Pinhead and the Cenobites. Here it is learned that the act of opening the Lament Configuration is not in and of itself reason to be targeted by the Cenobites. As Pinhead states, stopping his fellow Cenobites from attacking Tiffany, it is not hands that call them, but desire. Thus, it was ChannardÂ´s desire who made him use Tiffany to open the box and, because of this, he is the CenobitesÂ´ target.
Kirsty ventures into the Cenobites' domain and encounters Frank Cotton (Sean Chapman). He reveals that he is condemned to Hell, and that his punishment is to be teased and seduced by writhing female figures on beds that withdraw into the walls, depriving him of any pleasure. He also reveals that he tricked her by pretending to be her father to lure her into Hell so that he can use her for his own pleasures. At this point, Julia appears and destroys Frank in revenge for his killing her (in the first movie).
In a vie for power, Doctor Channard, having been changed into a Cenobite, kills Pinhead and his minions. Kirsty later tricks Doctor Channard by donning the deceased Julia's skin, giving Tiffany the opportunity to finish the Lament Configuration puzzle, killing Doctor Channard and allowing them to return home and close the gate between the two worlds. The movie ends with Kirsty and Tiffany leaving the now unoccupied hospital. Two men are removing what remains in the doctor's house and one of the movers comes across a blood-stained mattress on the floor. As he bends down to examine it, two arms reach out from the pool of blood, killing him as they withdraw, taking his upper half with them.
When the second mover finally enters and observes the scene, a large spinning pillar rises from the bloody floor, decorated with several Cenobite faces inset, including Pinhead's. Staring at the ghastly faces, one of them (the vagrant from the first film) speaks to the mover, asking him, "What is your pleasure, sir?" as the movie ends.

Question: Why is Kirsty in  psychiatric hospital?
Answer: She's haunted by horrifying visions 
Alternative answer: She saw her family be destroyed.