It's perfectly simple - folk consists of

a) all traditional songs, irrespective of what you do to them
b) all traditional tunes, irrespective of what you do to them
and
c) varying quantities of other stuff, defined by varying criteria but usually not irrespective of what you do to it.

So Long Lankin played by Metallica and remixed by the Aphex Twin would still be folk, but if you want your own stuff to be folk you generally have to play an acoustic guitar or similar. The rules are even stricter for cover versions, which should include at least two designated folk instruments. Hence London Calling can be called folk when done by the Bad Shepherds (fiddle, mandolin and whistle) but not when done by the Clash - or when played by Metallica and remixed by the Aphex Twin, for that matter. This also explains the controversy over Jim Moray's cover of All You Pretty Girls, most of which only includes one designated folk instrument (melodeon) - bad form there, Moray.

Joking apart, I'm really not bothered about this any more. I know what works for me, and most of it is traditional. It's a bit like being a massive fan of a particularly distinctive artist - Leonard Cohen, say, or Tom Waits: you aren't going to like everything they record, but you know that any random album of theirs is likely to contain more tracks that really do it for you than any album by somebody else. I don't like every traditional song ever recorded (!), but traditional songs have a much, much higher hit-rate for me than just about anything else. (Even if they're played by Metallica and remixed by the Aphex Twin - or arranged by Bellowhead.) Which is why I used to get arsey about the definition of 'folk' - if you can't hear this amazing music anywhere but designated folk contexts, it's a shame for it to get crowded out even there. I still think that's basically correct, I just don't think it's useful to get riled about it.