As somebody who was part of feds on Prodigy Classic in which some really over-the-top storylines and such were done, I can say that, yes, we often stretched the lines of believability in e-wrestling and we probably wouldn't get away with some of that stuff in today... in some e-feds, certainly not.
My philosophy on suspension of disbelief is this: When I find myself having trouble doing so, then I'm less inclined to give praise. I know there are circles out there in which people freely have characters who committed murder and bring that fact up, so yes, there are those who don't care about that. When it comes to somebody committing murder, though, it's harder for me to accept it in e-feds these days. So, from my own personal perspective, if somebody does that in an RP, I'm less inclined to vote in favor of that character.
That being said, if a character does something over the top but it doesn't stretch my suspension of disbelief too much, then go for it. If your character has a birth defect, for example, but you are able to make it work in the context of everything, then have fun with it.
As far as character development goes, that comes back to motivation and intent, but in a tournament or when preparing for a match, you gotta hype the match. That means you bring up the match or tourney, you talk about your opponent, and you detail how you relate to your opponent, staying consistent with your motivation and intent. Fail to bring up the match and/or opponent and you have general RP but not something that makes me interested in the match. If your character doesn't talk about the match, why should anyone care?
Yes, I know... people like to see general character development. But that doesn't mean we just ignore the matches and our opponents, or otherwise they become irrelevant and there is no purpose in having them. So never forget the hype part -- it's an essential part of doing an RP for a match or tourney.
EDIT: Oh, and let me tell you the story about CSWA running a storyline in which the Red Midget was murdered, Sammy Benson got arrested, Chad Merritt was revealed to be behind the whole thing, but it turned out the Red Midget faked his own death... and then Teri Melton woke up to find Hornet in the shower and he told her that season of CSWA was all a dream and none of it ever happend.
OK, I made up the part about Teri and Hornet.