I like Quasqueton's point about backgrounds that are far too elaborate for 1st level characters; in fact, I was all psyched to post it myself, but he beat me to it.
One of our problem players, now thankfully no longer gaming with us, used to do that, as well as the other "bad background" things Quasqueton mentions. We'd get the starting-power-level character who was involved in ridiculously overpowered events before the game started, who also had a personality in play which was diametrically opposed to the personality suggested by the background, and who also typically violated one of the campaign concepts discussed by the GM at the start of the game (if you said "make characters who would be interested in doing good deeds on the high seas," her character would be the murderous bandit queen of the mountain passes). It was like hitting the trifecta of Bad PC Design.
She also rarely shared her character background with anyone else, even the GM. It was all top secret, I guess. Or she couldn't be bothered to finish it, or she just liked complaining that we'd started the game before she had a chance to finish it (funny, because we take 2-4 weeks after the game is announced and characters are being made before we actually play).
That's about as bad as any problem we've ever had with character backgrounds has ever gotten.
With our healthier, more well-adjusted players, we follow this rule:
Joshua Dyal said:
1. Start the campaign off with a chargen session where everyone makes their characters together and works together to make sure there's some reason why their characters are all together.
...and it works out very well. In general, people work up as much background detail as they want to, if they want to work up any details at all. The broad strokes of their character, though, are discussed early on with the other players and the GM: usually the main questions are "Why are the PCs hanging around each other?", "What kinds of things do they do as a group, and what group goals do they have?", and "What kinds of things do they NOT want to do?"
Getting answers to those questions early on is immensely helpful to both the players and the GM. It also gives people who want to have some kind of backstory-related goal the opportunity to pitch it to the GM before the game begins, to see whether it's something that can work in this particular game. If the GM says it'll work, it gives the other players advance warning so they can try to figure out reasons for their characters to be interested in that goal as well if they want to. If it won't work, the idea can be scrapped before anyone gets too attached to it (and almost certainly will be able to fit into another game later on).
Personally, I consider the bulk of a PC's background to have nothing at all to do with the GM: it's there for the player's sake and no one else's. Sometimes it's fun to work out all the things like who a PC's family was or their pet's name or whatever; it can make playing that character more entertaining for the player. But as far as the GM's concerned, it shouldn't (and doesn't) make much difference, because it's more important to stay focused on what kind of person the PC actually
IS right now, what their opinions on current campaign events are, and what plans they're making for their immediate future. If there's something in the background that can help answer those questions or shape those plans, that's the kind of thing that gets discussed during character generation.
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eventually we're going to try having no backgrounds at all, and just handle them in flashbacks

ryan