In languages like C or Pascal, data objects may be allocated in several
ways. (Recall that by "objects" I just mean data objects like records.)
They may be allocated statically (as in the case of global variables), or
on an activation stack as part of a procedure activation record (as in the
case of local variables), or dynamically allocated on the heap at run time
using an alloction routine like malloc or new.
Scheme is simpler--all objects are allocated on the heap, and referred to via pointers. The Scheme heap is garbage collected, meaning that the Scheme system automatically cleans up after you. Every now and then, the system figures out which objects aren't in use anymore, and reclaims their storage. (This determination is very conservative and safe--the collector will never take back any object that your program holds a pointer to, or might reach via any path of pointer traversals. Don't be afraid that the collector will eat objects you still care about while you're not looking!)
The use of garbage collection supports the abstraction of indefinite extent. That means that all objects conceptually live forever, or at least as long as they might matter to the program--there's no concept (at the language level) of reusing memory. From the point of view of a running program, memory is infinite--it can keep allocating objects indefinitely, without ever reusing their space.
Of course, this abstraction breaks down if there really isn't enough memory for what you're trying to do. If you really try to create data structures that are bigger than the available memory, you'll run out. Garbage collection can't give you memory you don't have.
Some people think that garbage collection is expensive in time and/or
space. While garbage collection is not free, it is much cheaper than is
generally believed. Some people have also had bad experiences with systems
that stop for significant periods to collect garbage, but modern GC's
can solve this problem, too. (If you're interested in how efficient
and nondisruptive garbage collectors are implemented, a good place
to start is my GC survey paper, available from my research group's web
site at http://www.cs.utexas.edu/users/oops.)