You have to make a "langauges" folder in your mod, and a subfolder titled after the language you use , like "languages/english".
This will also mean creating a "localization.xml" file (which is a text document which lists which text .pngs are changed off of default by the localization). If you know another language, you can look at how the localization is done for that and then make a copy with what you want to change (it's fairly straight-forward, you just comment out or delete the lines that aren't for text you're switching).
The image file itself goes in a sub-folder "localization". You'll want to make images for...

"character_coda" (this is the little name by the stairs)
"characterBig_coda" (this is the big name when you actually select the character)
"characterSelect_coda1"
"characterSelect_coda2"
"characterSelect_coda3" (These three are the three lines of the character description)
"/selection/character_coda" (This is the blue text that shows with scoreboards and in the LevelEditor. It needs to be in a subfolder... /localization/selection)

If you want an example, click my workshop icon on this post and check out some of my mods: Demeter, Berceuse, Maestra, and Wolfgang all have custom localization. Open them up in the mods folder and you can see how to set it up.