Everett and Delmar arrive in Everett’s home town only to find that Everett’s wife, Penny (Holly Hunter), is engaged to Vernon T. Waldrip (Ray McKinnon), campaign manager for gubernatorial candidate Homer Stokes (Wayne Duvall). She refuses to take Everett back and is so ashamed of him that she has been telling their daughters he was killed by a train.
While watching a film in a cinema, Everett and Delmar discover that Pete is still alive. The sirens had turned him in to collect the bounty on his head. After Everett and Delmar rescue him from jail, Pete tells them that he revealed the location of the treasure. Everett admits that he only was in prison for practicing law without a license and that there was never any armored car robbery, nor treasure. He only mentioned it to persuade the other men (who were chained to him) to escape so he could reconcile with his wife, who wrote to him, telling him she would be getting remarried. Pete is outraged at this news, primarily because he only had two weeks left on his original sentence and must now serve an additional 50 years for his escape.
The trio stumbles upon a Ku Klux Klan rally, in which the Imperial Wizard sings “O Death,” and discovers that Tommy has been captured and is about to be lynched. The three disguise themselves as the color guard and attempt a rescue, but Big Dan, a Grand Cyclops in the Klan, reveals their identities and chaos ensues, in which the Imperial Wizard is revealed to be Stokes. The trio flees the scene, with Everett cutting the wires supporting a large burning cross, which falls on and incinerates some of the Klansmen (including Big Dan).
Everett convinces Pete, Delmar, and Tommy to help him win his wife back. Disguised as musicians, they sneak into a Stokes campaign dinner she is attending. Everett tries to convince his wife he is “bona fide,” but she brushes him off. The group begins an impromptu musical performance beginning with “In the Jailhouse Now” followed by “Man of Constant Sorrow,” during which the crowd recognizes them as the Soggy Bottom Boys and goes wild. Stokes, on the other hand, recognizes them as the group who disgraced his lynch mob and shouts for the music to stop, angering the crowd. He denounces the Soggy Bottom Boys as hostile to the social order, but the crowd is unimpressed and runs him out of town on a rail. Pappy O’Daniel (Charles Durning), the sitting governor, seizes the opportunity. He gets on stage, dances, and endorses the Soggy Bottom Boys, granting them a full pardon; he then has them join in singing “You Are My Sunshine” while the event is played on the radio. Penny accepts Everett back, but demands that he find her original ring if they are to be married. As they leave the dinner, they run into a mob taking to jail a jubilant George, who happily claims he will be electrocuted. Delmar comments, “Looks like George is right back on top again.”
The four men set out to retrieve the ring, which is at a cabin in the valley where Everett originally claimed to have hidden the treasure. When they arrive, Cooley and his men arrest them and prepare to hang them. Everett protests, stating they had been pardoned on the radio, but Sheriff Cooley ignores their pleas, responding that where he comes from, “[they] don’t have a radio.” The three start to despair while Everett improvises a prayer to be saved. Suddenly, the valley is flooded and they are saved from hanging while Sheriff Cooley, his dogs, and his men drown during the flood. Using one of their coffins as a raft, Pete and Delmar jubilantly praise God, while Everett dismisses the incident as luck. He pipes down though, as a cow floats by on top of a submerged cotton house. Tommy finds the ring in a desk on which he is floating, and they return to town.