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"Chopped & Channeled" is another term I have come across in the hotrodding scene.
Chopped and channeled refers to two different things, but are usually done together to create a specific look usually utilized by hot rodders.
Here is a decent attempt at a Photoshop "chop job" (pun intended), but it is a pretty good representation of a before and after of what it would look like:
In this image you can see the top is lowered. The basic events would occur something like this:
Channeling a vehicle where you cut out the floor pan of a vehicle and allow the frame to come up farther into the vehicle. The main purpose of a channel job is to allow the body of the car to sit closer to the ground without suspension travel. This process was done before when there wasn't as many options or manufacturing techniques available to modify the suspension in vehicles. It is a lot less common today to see this kind of work done. It is very involved and requires a lot of welding skills to accomplish.
The main reason someone would do either of these processes to a car is strictly for aesthetics. It's just the way the person wants a vehicle to look.
Negative effects for chopping the top are head room for the driver and passengers. To compensate, the seats can be lowered or lower seats added to accommodate. Doing this, though, makes it harder to see around the vehicle (line of sight). In all things there is a trade off.
As for channeling a vehicle, there needs to be extra attention give to clearance of the wheels to wheel wells as well as how far the front wheels turn. If not, rubbing will occur. In most of the older cars where this is applied, a stiffer suspension will probably be needed so as not to allow for the "boat" motion to occur. Too much bounce/jounce can cause tire contact with the body as well.
Basically there is no vehicle requirements to perform a chop job. It can be done to any vehicle as long as the person doing it has the skills to make it happen. Does this mean it would look good on any vehicle ... the simple truth is probably not, but that is up to personal interpretation.
The main thing you'd need to channel a vehicle is a frame separate from the body. Many cars today are unibody setups (the car body acts as the frame), so don't have a typical frame. In these cases, though, there usually are many options to lower the vehicle to the ride height which the owner would like.
In either case of Chopping or Channeling, these are usually applied to vehicles of American origin from the 1930's, 40's, & 50's. There is usually a specific look the owner is going for to recreate how it "used to be done" back in the old days. This doesn't mean the work isn't done to other cars outside that realm, though.
To see a real car that has been 'chopped' and 'channeled', check out my custom car: http://lilmerc.co.uk
As stated in the answer above, the 30s/40s/50s/60s cars are usually the best candidates as they have a separate chassis and body - after this period (and in modern cars) the chassis and body are merged together (this is referred to as a monocoque).
The purpose of a chop & channel? Because it makes the car look cool!
As you can see with my car, the "before" photo shows it is an eyesore/ an ugly-duckling / just horrid.... the "after" photo shows it is now sooooo much better with a 5" roof chop, channeled to lower it further. It doesn't look like the same car, but I assure you, it is.
update: a couple of photos as requested
It is where part of the floor of the body shell is cut (chopped) and the slid over the chassis. So normally the whole body would sit on top of the chassis, it now fits around so the sides over lap the chassis rails.
The floor is then modified to fit.
The purpose is to make the vehicle lower without affecting ground clearance.
