What is a common method to handle a client trying to DOS the server by flooding it with udp packets?
I have heard of iptables in a typical web setup before but somehow didn't make the connetion
That's because it doesn't help. If someone tries to DDoS you through some kind of botnet/reflection/amplification attack, the main problem is that the wire between the internet and your servers is too narrow. It doesn't matter what you do with the packets that do make it through, because the problem is the overload upstream from you.
Typically, you will want to mitigate in a number of ways:
1) Try to call upstream through the ISP and carrier networks, to stem the traffic at sources. This works better if the attack is from a concentrated source, and you'll need to already have good working relationships with the ISPs involved to get anywhere. Residential Internet or "business cable" hosted? Forget about it.
2) Buy a DDoS protection service. There are a variety of companies, such as CloudFlare, Neustar, Verisign, Level 4, and others. This works by sending the traffic to the DDoS service while under attack, and they write filters that separate attack traffic from your real traffic, and only forward the latter. They have data centers with hundreds to thousands of gigabits of connectivity. The cheaper versions work through DNS, which means that it takes a while to activate, and it won't be 100% effective because the botnets may have cached your older IP addresses. The better (more expensive) ones let you swing your BGP announcement over to them -- they effectively "take over" your public IP addresses -- which takes effect within a minute. Requires a lot of networking knowledge and hardware on your team, though -- no "shared hosting" place is going to be able to enable this.
3) Buy more network capacity. It turns out, bandwidth is actually cheap once you're past the "last mile." If you put your servers in a well-connected data center somewhere, you can easily get multiple fat pipes straight into your section of the DC. As long as the first layer of router/firewall can filter "bad ports" (like DNS, NTP, and such) and your application servers can trivially reject packets from non-existing sessions (hash table look-up, drop the packet) then this is a fine way to solve the "rage booter service" level of DDoS. Again, "shared server" setups are unlikely to be able to do this, and "home internet" or "business cable" type deals aren't really going to cut it. If you're in a c-location facility, you should be able to get 10 Gbps Ethernet drops for a couple of thousand dollars per month from a cheap provider like Cogent. If you buy higher-quality connections, you can often get a lower commit (like 1Gbps 95th percentile) on a fatter pipe, so when the attack hits, if it's short, you dont' care; if it's long, the worst that happens is ISP overage charges.
4) Finally, if your "shared host" is really big, like Amazon Elastic Compute Cloud, or Google Cloud Computing / App Engine, then those data centers may have enough capacity to "swallow" the traffic (or at least ingest it.) Except the links to your servers may or may not be able to take it. And Amazon charges through the nose for bandwidth. (I think that's where they make most of their profit, to be honest!) However, there are some solutions, or options that can help, like smart configuration of Amazon Elastic Load Balancing or whatever. It depends on the attack.