Well, I ended up booting into the Recovery partition and selected "Reinstall Mountain Lion".
After it downloaded for about an hour an a half it reinstalled the operating system and then had me restart the computer.
I restarted and instead of going through the setup process, I was asked to login.
The new password worked! and all my stuff was still there!
I guess it was good I didn't wipe the drive before doing the reinstall, not sure what went wrong to begin with but now things are going well again. Hurray!