We study blow-ups in generalized Kähler geometry. The natural candidates for submanifolds to be blown-up are those which are generalized Poisson submanifolds for one of the two generalized complex structures and can be blown up in a generalized complex manner. We show that the bi-Hermitian structure underlying the generalized Kähler pair lifts to a degenerate bi-Hermitian structure on this blow-up. Then, using a deformation procedure based on potentials in Kähler geometry, we identify two concrete situations in which one can deform the degenerate structure on the blow-up into a non-degenerate one. We end with a study of generalized Kähler Lie groups and give a concrete example on {(S^1)^n times (S^3)^m}, for n + m even.