Time capsule error "Unable to create disk image"

Apart from all the various issues on the discussions I noticed the following with the latest releases on the TC 7.4.1.
My time capsule stopped backing up and started asking for a password; also the capsule was unable to mount on the desktop in the finder. If I gave the TC an I.P could mount it but it still refused to back up, one of the other things I noticed the TC started to ask for a password, which it never asked for before the software update.
My solution given two weeks of late nights going out of my mind were to delete my prefs including my keychain prefs and repair my permissions using disk utility, which found several problems, my TC now backs up after several weeks without it going backwards and forwards through previous updates etc.
It's drastic but it worked for me.
Hope this helps

I am still experimenting. To narrow the problem, I decided to create individual disk images of the folders in the User folder. The first one I tried was 7 GB and worked fine. Overnight, I tried one that is 13 GB. It failed with an out of room message on the startup disk! The startup disk has 17 GB free. Nothing should have been written to the startup disk!
This time, I configured Disk Utility to read from the startup disk and write to an external disk. The destination disk had more than enough space. But, I ran out of space on the source. It appears that Disk Utility is writing all or a portion of the compressed file to either the startup or the source disk and running out of room.
Previously, when I created the image of my user folder (instead of my wife's), the source was my user folder on the startup disk and the destinaion for the image was on an external disk. The difference I see is that my startup disk has enough free space for the entire compressed image file.
In my first attempt that gave me the -39, both the source and the destination disks were external. So maybe Disk Utility is creating the image on the source and at the end copying it to the destination. This would explain the difference in the error messages.
I'll try to confirm all of this in the next few days and report my findings.

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