Nov. 11 (Bloomberg) -- Neil Schulman is in a bind.

The 55-year-old filmmaker borrowed $170,000 to complete ``Lady Magdalene's,'' a comedy about an Internal Revenue Service agent assigned to manage a legal Nevada brothel in tax default, he says. He hasn't found a distributor, and the home in Pahrump, Nevada, he planned to sell isn't worth enough to cover the debt.

``Our backup was going to be the equity we had in real estate, and that equity has been wiped out,'' Schulman said in an interview. Given the film's potential commercial appeal, ``You'd think distributors would be coming to us.''

All the major studios have turned Schulman down, testament to the shrinking number of indy-film slots that have limited paydays for independent producers. At the same time, the credit crunch, falling real estate prices and the slump in stocks are choking access to funding, whether it's from traditional friends- and-family investors or the filmmakers' own resources.

``People are having a harder time getting money at the $500,000, $1 million level than they were a year ago,'' said Jeff Dowd, a movie consultant who has arranged buyers for films including ``The Blair Witch Project.''

Box-office leader Time Warner Inc. led the contraction this year, merging New Line Cinema into the larger-budget Warner Bros. label, and closing Picturehouse and Warner Independent Pictures.

Paramount, Disney

No. 2 Paramount Pictures, owned by Viacom Inc., said last month it will reduce releases by one-third to 16 a year. Titles from its Vantage unit, devoted to independent films, were cut to four next year from eight in 2007. Walt Disney Co. cut production to 21 films last year from 28 in 2006, according to researcher Box Office Mojo LLC in Burbank, California.

With studios buying fewer small-budget films and funding to make them drying up, the number of independent movies is likely to drop next year after more than a decade of growth, Dowd said.

Submissions to Robert Redford's Sundance Film Festival, the largest U.S. celebration of independent movies, surpassed 8,700 this year, from about 2,600 in 1998.

That's left filmmakers shouldering a bigger share of the risk. Lance Hammer, who won the best-director prize at Sundance, ultimately decided to distribute ``Ballast,'' his tale about a family coping in the aftermath of a suicide, himself.

Shopping Reels

Since April, Hammer has filled his days pitching the critically praised movie to small theaters, church groups and universities.

``I wanted there to be another choice but there wasn't,'' said Hammer, who made ``Ballast'' with less than $1 million of his own money and investments from two friends. ``There's a pall over the whole industry.''

Filmmakers saw the market begin to contract at Sundance in January, when ``Ballast'' and other small-budget dramas were overlooked by the specialty divisions of the major studios.

After the festival, Hammer struck a tentative deal with IFC Films, a New York-based distributor. Hammer said he backed out of the agreement because he didn't want to give up control of the film.

Hammer plans to use the do-it-yourself theatrical run to build awareness for ``Ballast,'' so he can try to recoup his investment from DVD sales and television. ``It validates the film, it creates publicity,'' he said.

Studio Glut

Independent films rarely broke through to a wider audience prior to 1989's ``sex, lies, and videotape.'' The Miramax Films release, made for about $1.2 million, took in $24.7 million. Founders Harvey and Bob Weinstein sold the studio to Burbank, California-based Disney in 1993 and, a year later, released ``Pulp Fiction,'' an $8 million film that brought in $214 million worldwide.

Other studios followed. Time Warner, based in New York, acquired New Line in 1995 through its merger with Turner Broadcasting System, opened Warner Independent in 2003 and formed Picturehouse in 2005. Paramount started Paramount Vantage in 1998. News Corp. added Fox Searchlight, in 1994.

Studios bid up prices for independent films, triggering more production, said IFC President Jonathan Sehring. Most independent pictures can't attract a big enough audience to support their cost, he said.

``They applied studio economics to the independent market and the economics were not the same,'' Sehring said.

Filmmakers `Begging'

With many independents shut out from studio release, distributors focused on small-budget films now see a bonanza.

``Compared to a couple of years ago, we'll find people coming, begging us to take their films,'' said Eamonn Bowles, president of New York-based Magnolia Pictures, the distribution arm of Mark Cuban's 2929 Entertainment.

Schulman says he has no regrets for making ``Lady Magdalene's,'' even though its failure to attract a sponsor has forced him to list his main residence in Culver City, California, for sale. The film, made for a total cost of $500,000, stars Nichelle Nichols of television's ``Star Trek'' and won awards at festivals in Los Angeles and San Diego.

Undaunted, Schulman is trying to raise $10 million to finance another film, ``Alongside Night,'' based on his 1979 novel about a catastrophic U.S. financial crisis.

``If there is any film that should attract the few pennies that are left in the marketplace, this is the one,'' Schulman said.

To contact the reporter on this story: Michael White in Los Angeles at mwhite8@bloomberg.net.

Last Updated: November 11, 2008 00:01 EST