Bad neighborhood can be said as network of web sites that have an irregular number of penalized or mostly banned sites for attempting various spamming techniques. These networks are at present or some times have been involved in link scheming, malware, hosting spy ware or involved in using some kinds of spamming techniques on there site. Google bad neighborhood penalty says not to be involved with these sites. Linking to these bad neighborhood sites may involve you as the part of network. So if you dont want to get de-indexed or drop in ranking never get involved with bad neighborhood.

So if you dont want to get involved in bad neighborhood penalty, never use unethical practices or linking to banned sites. Always believe in white hat seo. Link to the relevant sites which will keep you out of bad neighborhood penalty.