Yeah, that should be the way to go. Did you try it with the Windows version? Maybe the Dreamcast version ran out of memory. Other than that, unlike the original Mugen, the Dreamcast version is picky with upper/lower case filenames. So if the original character creator didn't pay attention to that in the .def file, the character might crash.
If it also crashes in the Windows version, that's some error in the interpreter. On that note, I'm sorry about the lack of error output (e.g. infos about what went wrong, etc.), I'll add that in the next version. If you don't mind, could you tell me which character crashed so I can take a look too?