The biggest creditors of the Inquirer and Daily News have developed a reorganization plan that would keep both newspapers alive but replace current management, their attorney said yesterday after a hearing in federal bankruptcy court.

Fred S. Hodara, an attorney representing a "steering group" of hedge funds and other major lenders, sought court permission to unveil their reorganization proposal and begin talking with the newspapers' unions about new collective-bargaining agreements.

The proposal would essentially set up open competition between proposals from the hedge funds and the current newspaper ownership group, led by chief executive Brian P. Tierney. His group, Philadelphia Media Holdings, has been working for months on a restructuring to bring the newspapers out of Chapter 11 bankruptcy.

Tierney said last night that from what he knew of the lenders' reorganization proposal, it would saddle the newspapers with excessive debt, in the $85 million to $100 million range, leading to continuing financial problems and deterioration of both newspapers, if the Daily News stays alive.

"Their plan is great for the Wall Street hedge funds that Mr. Hodara represents, but horrible for the Daily News, our advertisers and readers," Tierney said.

Tierney said his own proposal would bring in $35 million from new equity investors and seek to pay off creditors with the newspaper building at Broad and Callowhill streets, valued at $29 million, and "the cash in the till," some $37 million.

The company's attorney, Lawrence McMichael, said Tierney's plan would leave the newspapers with less than $30 million in continuing debt.

Under prior rulings by U. S. Bankruptcy Judge Jean K. FitzSimon, Tierney's group has until Aug. 31 to present its plan, and until Oct. 31 to promote the plan among different creditor groups. Other parties are not allowed to propose alternatives.

But FitzSimon temporarily withdrew from the case last week for health-related reasons. Late Monday night, on the eve of a status hearing, attorneys for the major lenders filed motions with FitzSimon's replacement, chief bankruptcy judge Stephen Raslavich, seeking to end the exclusivity periods immediately and also to contact the unions representing about three-quarters of the newspapers' 4,600 full- and part-time workers.

All 16 of the company's union contracts expire at midnight Aug. 31.

Last week, Tierney asked the unions to agree to a 30-day extension of their contracts and all but the Newspaper Guild, representing reporters, photographers, editors and advertising salespeople, have agreed, according to company spokesman Jay Devine.

Raslavich scheduled an Aug. 28 hearing on the lenders' request to put forward their own reorganization plan.

The judge chided both the lenders and the current ownership for "overplaying their hands" with "utterly untenable offers," clearly unacceptable to the other side.

"Sounds to me like high-stakes poker," Raslavich said.

The creditor steering group includes six hedge funds and money-management firms - Angelo Gordon & Co., CIT Syndicated Loan Group, Credit Suisse Candlewood Special Situations Master Fund LTD, Eaton Vance Management, General Electric Capital Corp. and Wells Fargo Foothill. They were joined in the motion by Citizens Bank, which arranged $295 million in loans to help Tierney buy the newspapers in 2006.