One prominent social-cognitive model of internalized stigma by Corrigan and his colleagues (2012; 2002) proposes that individuals are exposed to societal stereotypes about mental illness, at least tacitly agree with them, and may apply them to oneself, engendering harmful self-beliefs. There is limited empirical support for this model in serious mental illness. Moreover, it is not clearly established how internalized stigma and its associated factors impact recovery in this population. The current study uses structural equation modeling (SEM) to assess the social-cognitive model's goodness of fit in a sample of Veterans with serious mental illness (Veteran sample, n = 248), and then validates the model in a second and independent sample of individuals receiving community-based psychiatric rehabilitation services (community sample, n = 267). Participants completed the Self-Stigma of Mental Illness Scale (SSMIS; Corrigan et al., 2006) and measures of self-esteem, self-efficacy, and recovery attitudes. Consistent with Corrigan and colleagues' formulation of internalized stigma, SEM analyses showed a significant indirect pathway from stereotype awareness, to stereotype agreement, to application to self, to self-esteem decrement, to poorer recovery attitudes. Additionally, there was a significant direct effect from stereotype awareness to self-esteem. This study shows that individuals with serious mental illness experience psychological harm from stigma in two ways: (1) through perceived public prejudice and bias, and (2) through internalizing these negative messages. In particular, stigma harms individuals' self-esteem, which then reduces their recovery attitudes.