how far to sand... I think that comes down to personal preferrence. I am taking my car down to bare metal for this paint job, although you can spray right over the paint currently on the car. That is how the partial repaint of mine was done. You can also sand down to the primer, and then spray.
One thing that works well is to sand down to the primer with a block or air sander (DA's are really useful, along with a board sander). Where the paint is left are your low spots, and need a skim of filler. Deep dents would be filled with something similar to a bondo. If you choose to use the Bondo products, I would recommend the premium stuff. Its three times the cost, but sands and applies much more smoothly. For shallow dents and to seal the filler, use a flexible filler called Icing. You will have to get this at a body shop supply store.
Another note, keep the filler use to a minimum. The thicker the filler is, the less it will hold up, and the more weight you're adding to the car. The premium bondo is more sturdy, but any filler, aside from a fiberglass reinforced type will crack if it is applied to thick.
