I have heard some stories telling how bad links can hurt your website ranking.
google penalize sites having links on bad sites. i read an article on seomoz telling how to recover from bad links, they too told that google penalize for bad links.

but recently i read an article saying that google do not penalize your site for having links on bad sites. the reason he gives were quite good.
The thing he pointed was. If google penalize for bad links then most of the peoples were hiring seo's for promoting the links of their competitiors on bad sites.
according to his theory the reason for lost ranking could be
one website has lots of backlinks some of them are on bad sites, the links were counted as good links as google was not aware of bad site.
Now google has started deindexing the bad sites and stop counting its links.
so the number of backlinks for the website are reduced as links from badsites are not included which will lead to falling ranking.

this article made me confused which one to belive.
i hope second one is true, can you suggest