The answer is the apple TV update to 5.1 messed it up. Here's the solution:
1. Download the previous version of your apple TV software here depending on your model:
Apple TV 2:
http://appldnld.apple.com/AppleTV/041-4362.20120605.t8i4U/AppleTV2,1_5.0.2_9B830 _Restore.ipsw
Apple TV 3:
http://appldnld.apple.com/AppleTV/041-4361.20120605.grjot/AppleTV3,1_5.0.2_9B830 _Restore.ipsw
2. When I downloaded it, it came as a compressed ZIP file. You need to change its extension to IPSW. (just replace zip by ipsw, no need to uncompress its contents)
3. You will need a MicroUSB to USB cable, in order to connect your Apple TV to your PC in diagnostics mode. Once you get it connected, open iTunes.
4. Wait til you see Apple TV on devices. Once you see it click on it.
5. Press and Hold the "Shift" key (PC) and hit the button "Restore". That way, instead of searching Apple's servers, you'll select the local file you just downloaded.
6. Wait til is restored and a message pops telling you to unplug the USB cable, then do so. In my case The Apple TV kept blinking a while and couldn't power it off with the remote. Just unplug the power cord and replug it after 10 secs.
7. Turn on Apple TV, select language. It'll try activate it. In my case it couldn't connect through Ethernet to the server. I unplugged ethernet cable and went to Network settings and set the Wifi password of my network. Then Restarted on Settings->General.
8. After Restarting it activated itself and everything is working as before. Hope it works for everyone affected. Cheers!