Helping people with computers... one answer at a time.
The "Manage Folders" link seems to have disappeared from the new Windows Live Hotmail. I'll show you where it's hiding.
There USED to be an option at the bottom of the list of folders in Windows Live Hotmail called 'manage folders'. In their infinite wisdom, at the last so called 'upgrade' they took that option away. Now I have no idea how to delete folders.
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You and a lot of people.
After posting a pretty silly workaround that I couldn't believe, a reader chimed in with the answer.
It's hidden. In plain sight. No, I wouldn't have thought to click there.
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Here's the folder list:

In previous incarnations of Hotmail there was an additional link: "Manage Folders" that allowed you to add, delete and rename additional folder of your own.
It's gone.
Here's the magic:

If you hover your mouse over the "Folders" label, a small "gear" will appear to its right.
Click on that:

There it is. Click on Manage Folders and you add folders, as well as delete or rename folders that you've added. (The base set of folders shown above cannot be deleted or renamed, only those that you've added can be.)
Thanks to Mike, first of the commenters below, to point this out.
Article C4389 - August 4, 2010 « »
November 22, 2011 6:11 PM
THANK YOU SOO MUCH!! i couldnt work out how to delete a folder in my hotmail account! thank god for this site because it showed me the steps on how to do it! thank you to the person who created this site!! :)
January 13, 2012 8:56 AM
When I hover the mouse over "Folders" the gear doesn't appear!!!!
January 13, 2012 10:43 AM
Aha, I have solved my problem. Not sure which version of Hotmail I have, but I figured out that if I right click on the folder name, it gives several options, including to "delete" the folder.
February 1, 2012 5:34 AM
I have been looking for Managed Folders for months so I could delete unwanted folders.
Leo thank you very much. You have solved my problem.
December 15, 2012 5:51 AM
I have no gear next to folders - just refresh - ????