Neuropathy is a progressive disease which is caused by one of over 100 causes. Diabetes is the the number one cause, but 70% of sufferers are not diabetic. 30 to 40% will be diagnosed with idiopathic neuropathy where the cause can not be identified. Those causes continue to degenerate the nerve endings over time, leading to loss of sleep from pain, burning, numbness, balance issues requiring the use of canes or wheelchairs, inability to drive and in extremely severe cases amputation.
In the early stages of neuropathy you still have some normal nerve endings. During the day wearing socks and shoes, moving around the normal nerve endings are stimulated and override the abnormal nerve endings, but at night when there is no stimulation to the normal ones the abnormal nerve endings become more dominate causing an increase in the abnormal sensations associated with neuropathy. Left untreated the sensations that were originally only experienced at night become the daily norm.
The short answer is the nerve is not dead, only the cells at the nerve endings have been effected, they have receded deeper into the tissues, then fire on their own causing the abnormal sensations. This is the reason that sufferers begin to feel like they are walking on a sponge or piece of cardboard, because the nerve ending are no longer at the sole of the foot but deeper in so there is more tissue between the nerve ending and the bottom of the foot.