Chicago was once the largest city in the former U.S. State of Illinois. Prior to the outbreak of civil war, it was the one of largest cities in the United States.
After Sons of Jacob staged a coup in the U.S and abolished the Constitution, they proclaimed the Republic of Gilead, however several areas of the United States refused to acknowledge the new government with Chicago metropolitan area being one of them. Since those events, residents in Chicago and the surrounding area of northern Illinois have been engaged in forms of guerrilla warfare against Gilead's military and the city remains a holdout, albeit in ruins.
In "Birth Day", Offred mentions in her inner monologue that "Guardians of the Faithful and American soldiers still fight with tanks in the remains of Chicago", confirming that the Second American Civil War was still ongoing at that point in the series.
In Season 3, the fighting in Chicago has intensified. Gilead has recently ramped-up the deployment of Guardians and ground-level Commanders to the front lines, training many of them at Fort Stevens before transporting them via rail to the city. In "Useful", several Commanders meet and discuss plans for expanding the Fort Stevens training facility to support their troop surge to Chicago.
They also discuss plans for conducting mass executions of prisoners (particularly Unwomen) captured in Chicago, as well as a sustained bombing campaign in the city. Commander Joseph Lawrence advises against the proposal and appears to have arranged for many of the women to be sent to the Colonies in lieu of execution.
Lawrence also advises against saturation bombing due to the "resources" that could be mined from the city, namely fertile women and children ("Women can be useful").
In Season 4, it is mentioned that Gilead is once on the verge of finally taking Chicago, but the city appears to have not been annexed and its spirit remains intact for now. After losing Brianna, Alma, and two others when they escape Aunt Lydia one more time, June and Janine find a train going west, to the Chicago war zone, carrying soldiers and supplies for the Guardians that still fight on that side of the country. They hide in refrigerator wagon full of cold milk during the night, and when the train crashes in the morning, they are found by American rebels in the conflict zone.
The city, being one of the ground zeros of the Second American Civil War, is very much destroyed and burned to the ground. The buildings are full of bullet holes, many skyscrapers are reduced to dust, and war aircrafts can be heard flying through the sky, most probably being from the Gilead side. The two women are taken to a hidden rebel base where many amateur soldiers train and fight.
- Episode 3.3, Useful