Macrophage activation and persistent inflammation contribute to the pathological process of spinal cord injury (SCI). It was reported that M2 macrophages were induced at 3–7 days after SCI but M2 markers were reduced or eliminated after 1 week. By contrast, M1 macrophage response is rapidly induced and then maintained at injured spinal cord. However, factors that modulate macrophage phenotype and function are poorly understood. We developed a model to distinguish bone‐marrow derived macrophages (BMDMs) from residential microglia and explored how BMDMs change their phenotype and functions in response to the lesion‐related factors in injured spinal cord. Infiltrating BMDMs expressing higher Mac‐2 and lower CX3CR1 migrate to the epicenter of injury, while microglia expressing lower Mac‐2 but higher CX3CR1 distribute to the edges of lesion. Myelin debris at the lesion site switches BMDMs from M2 phenotype towards M1‐like phenotype. Myelin debris activates ATP‐binding cassette transporter A1 (ABCA1) for cholesterol efflux in response to myelin debris loading in vitro. However, this homeostatic mechanism in injured site is overwhelmed, leading to the development of foamy macrophages and lipid plaque in the lesion site. The persistence of these cells indicates a pro‐inflammatory environment, associated with enhanced neurotoxicity and impaired wound healing. These foamy macrophages have poor capacity to phagocytose apoptotic neutrophils resulting in uningested neutrophils releasing their toxic contents and further tissue damage. In conclusion, these data demonstrate for the first time that myelin debris generated in injured spinal cord modulates macrophage activation. Lipid accumulation following macrophage phenotype switch contributes to SCI pathology. GLIA 2015;63:635–651 Main Points Myelin debris generated in injured spinal cord switches macrophages from M2 phenotype towards M1‐like phenotype and results in the formation of foamy cells and lipid plaques. Foamy macrophages are pro‐inflammatory because they are neurotoxic, defective apoptotic/necrotic cell clearance and showed delayed wound healing.