I'm not familiar with the "bugged version". I assume you're referring to a pirated copy.
The best way to install it would be to back up your data files, email, any other information you'll want to restore, and have the latest drivers for your hardware already downloaded and on a CD for quick installation after you install Windows, and then completely erase the primary partition. You can't "upgrade" from any other version of XP or 2000 to XP Home, so hopefully you didn't get the upgrade version, unless you have an older valid disc for Win98 or WinME.
If you didn't want to make a backup, then yes you could just delete the Windows folder, but you'll still have to reinstall all your software and drivers. Erasing the partition entirely ensures that you've gotten rid of any unused files and folders outside the Windows folder as well as ensuring no leftover DLLs or drivers are located anywhere.
You could technically just install right on top of the existing Windows folder without deleting anything, but that leaves every old driver and DLL that was ever installed on the system, unless it's specifically replaced during the installation.