Personaly I think holds should be at least 3 days then with maybe one or two possible extensions. I personally think that it helps if mods notify players when their holds run out as often players really do forget and are no less dedicated.
I think general rejections are always bad. Even if someone's character is very ooc, it is too short or the writing is not good quality it is always best to say that straight out (or at least in a politer way). For challenges just simply say the same I think. That the other charcter simply fit better (maybe a reason) and assuming the lost challenger is still good enough ask if they want to hold another character and encourage them to.