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So on the OP I didn't mention I didn't recently test any other games but Balatro, but then after posting it, a couple of hours late I had a chance to test with Earth Defense Force 6 and Gotham Knights also, and it didn't record any audio.
Then I saw a thread of people with the same issue https://steamcommunity.com/groups/SteamClientBeta/discussions/5/4416424085344944792/?ctp=4
So, I switched to the Steam Client beta and now the game recording audio is working without changing any other settings. Tested with Balatro, EDF 6 and Gotham Knights and they all record audio now, so it was the issue with Steam Client, not Balatro or any games..
(I thought maybe initially it was Balatro's engine at first not causing audio recording not to record audio but of course that was not the case)