How does the theme folder work in drupal 7? In Drupal 7, I would disable a theme within the admin section and i would physically rename the theme directory (from themeName to themeName_old), clear cache and restart the server, to my surprise, drupal 7 still picks up the theme (themeName_old).  

The only only way i managed to get rid of a theme completely is by removing the the directory from the theme folder. Why is that?
Folder name does not matter. What matters is name of the info file. If you have themeName.info in folder, Drupal knows it's a folder for a theme named themeName.