there are several approaches to this, and depending on the game itself, you can do several things.

One solution is to have several models that represent the damage states, then you can use ent_morph to switch to more damaged states every time (this is more for an overal damage to a whole entity); I would consider this the easiest method.

Personally, I would refrain from using animations for damage states at all.
That's me though, maybe other users can correct me on this.

another solution is to use bitmasks, this one is quite tricky though. You setup your model with all the damage states as subgroups. You can then use traces to check which group was hit, and set a group on or off depending on the current damage state.

For debris falling/flying off, you can make models that you can script flying out (using physics maybe even). And for added effects make use of particles (explosion on impact point, then going into smoke. And the debris flying out from the explosion to have fire attached to it) It sounds harder then it actually is, to get a nice particles effect, you can make on in the Tool created for the last contest, and export the code from that.

All this should be able to work in the Free version of A7/A8.

Just my idea's written down here, I hope this helped you out in the right direction, good luck.
If anything else is needed, just write it down, me or someone else will help you out

regards,