For VLC itself, this is just what worked for me.
Tools tab -> Preferences -> Subtitles and OSD
For simplified subs, select "Simplified Chinese Unix (EUC-CN)"
For traditional subs, select "Traditional Chinese (Big5)"
Now the tricky part. Each Chinese font can display simplified, traditional, or both types of Chinese. Also your fonts will differ depending on what Chinese software/language packs you have downloaded.
ie. Microsoft Yahei -> simplified Chinese
Microsoft Jhenghei -> traditional Chinese
DFKai-SB -> both
This method still works as of 11/1/2015. My VLC player finally works on Windows 10. I have given it up for years. I am a loyal media player classic v1.7.9 guy, but folks using Mac don't have the latter, so they have to stick with VLC. A friend of mine using Mac El Capitan confirms this method works.
This garbled Chinese problem used to occur on the VLC app on iPhone, too. But as of the 10/21/2015 version, it has been fixed.