What steps to take in painting this damaged wall?
Did you go too far? I don't think you did. It is best to remove the loose material. I would use some topping compound and fill the area and lightly sand. This will give a normal look. If you just prime and paint it will be visible for years. I use topping mud where I need a thin coat. It sands easier then prime and repaint and you will have a professional looking repair.