Torchlight 2 crash message: Unable to determine file type( Best Guess ASCII)

Suddenly and at random, I get this error message when trying to start Torchlight 2:

I'll type it out for search engine crawlers:

"Unable to determine file type( Best Guess ASCII). You need to save the file as unicode - recommend doing it in word pad."

I came upon many people with this issue, but this one in particular seems to have the answer:

http://forums.runicgames.com/viewtopic.php?f=54&t=33831

Someone recommended deleting local_settings.txt. Well, I did that and Torchlight 2 indeed started up, but I lost two of my newest characters! I checked the save folder, though, and still see them there, so they're not gone. I also tried saving the local_settings.txt file as unicode using WordPad, but no luck. I will add that, when I opened the file in WordPad, it was completely blank. When I opened it in Notepad2, I saw SUBSUBSUBSUBSUB all over the place. This is indicator numero uno that the config file got severely corrupted since it's supposed to contain readable and manually editable configuration information.

Anyone know what could be the issue?

Edit: This person here says he experienced a blue screen before getting the error. Last night when I closed Torchlight 2, my PC blue screened as well.

http://forums.runicgames.com/viewtopic.php?f=54&t=45718

Solution 1:

I FIXED IT. As I said in my question, deleting local_settings.txt allowed me to run the game, but I had lost some of my save games even though I could still see them in the save folder. For each save game, it appears there is a .SVB and .restore file. I backed up the .SVB file, deleted it, and then renamed the .restore file to .SVB. My game returned! I probably lost a few hours of progress considering the file update times were a few hours apart, but it's better than losing it all.