There are two categories of email folders in Hotmail: those you can delete, and those that cannot be deleted. The five "standard" folders cannot be deleted, since they play an integral part of the way Windows Live Hotmail works, and to avoid confusing accidental renames, for example (you can rename your own folders in Hotmail). So, aside from inbox, junk, drafts, sent, and the deleted folder, all you can delete all other folders and subfolders, as you'll learn in this tutorial.
Once logged into you Hotmail account, go to your inbox, and move your mouse pointer the "Folders" on the left pane. Once the "gear" icon appears, click on it, and choose "Manage folders" from the menu that opens:
Windows Live Hotmail will load the "Manage Folders" screen, with a full listing of all email folders and subfolders in your account. Check the checkbox next to the name of the folder or subfolder you want to delete: if it doesn't show a checkbox, this means that the folder in question cannot be deleted (like your Inbox, Junk folder, etc.)
Then, click on the "Delete" link at the top of the page, as shown on the screenshot:
To prevent accidental deletions, Windows Live Hotmail will first display a final confirmation message before actually deleting the selected folder: "Are you sure you want to delete this folder? Any mail in this folder will be moved to the Deleted items folder".
Hotmail Tip: note that you can delete several Hotmail folders at the same time; to do so, simply check the checkbox next to all the folders you want delete, and click on the "Delete" link as explained above. In that case, the error message is updated to say "Are you sure you want to delete these folders? Any mail in these folders will be moved to the Deleted items folder". This is an easy way to ensure that you have not accidentally selected multiple folders for deletion!
Click on the "OK" button to delete the selected folder or folders from your Hotmail account: as soon as you do, Windows Live will bring you back to the same screen, and the folder / subfolder you selected should have now been removed from your account. If you click on the "Deleted" button on the left to load the content of that folder, you will see all email messages that were inside the folder you just deleted.
If you want to "undelete" a Hotmail folder, just re-create the folder, and restore its deleted email messages inside it!