IIRC, the jailbreak is proof against either firmware updates, or resetting to factory defaults, but not both at the same time. (Although recent snapshots might try to automatedly guard against that too?

)
There is a good chance you uninstalled the jailbreak.
If your jailbreak is intact, you will want to downgrade to a firmware that is Collections-friendly. Ideally, fw5.4.0 which the PW2 shipped with, since it handles hidden books and nested collections (the pre-Cloud-Collections goodies).
See Ixtab's partition images, hopefully the instructions won't scare you off!
http://ixtab.tk/kindle-touch-images/PW2/README.txt