The only workaround I have found so far is to downgrade all the python extensions in VSCode to the previous versions before this newest update. Namely, I am using Python extension v2025.14.0, Python Debugger extension v2025.10.0 and Python Environments extension v1.8.0.
Using those versions the debugging works as before, with the same configurations.
I guess we'll have to wait until the bug gets fixed before updating the extensions again.