During this time, reduce watering. The fewer leaves the plant has remaining, the less water it will use. If you continue to water normally, there is a chance of causing root rot. As new leaves are formed, begin increasing irrigation frequency. It is good to know that someone else likes to grow chile as a houseplant.
Many people think that it is an annual and only lives for the summer.
The fact is that it functions as an annual because it freezes outside. In warm climates, or when it is grown indoors, it can live for several years. It is damaged from about the 2nd inch off the ground for about 12 inches. The vertical extent of the injury that you described is not as critical as the extent of the damage to the circumference of the tree. A new tree will do a better job.