By Tracy Rucinski

CHICAGO (Reuters) -- American Apparel Inc plans to revamp its struggling fashion business under a restructuring plan that would give ownership to the Standard General hedge fund, which rescued RadioShack earlier this year, lawyers said at a hearing on Tuesday.

American Apparel Inc, the country's largest "Made in the U.S.A" brand, filed on Monday for Chapter 11 bankruptcy protection. The company is saddled by debt, excess inventory and millions of legal liabilities tied to its founder Dov Charney.

Known for its sexually charged advertising and tight T-shirts, the retailer is attempting a traditional turnaround under the control of its bondholders, rather than auctioning off assets.

"American Apparel is in the early stages of an operating turnaround," the retailer's attorney, Scott Greenberg of Jones Day, told U.S. Bankruptcy Judge Brendan Shannon at a hearing to approve $90 million in financing to pay bills, including wages.

Under the plan, other sophisticated hedge funds such as Monarch Alternative Capital, which played a role in movie rental chain Blockbuster's bankruptcy, will also provide $70 million of new capital over the next six months.

Liquidity from senior bondholders will help American Apparel hire new talent to boost Internet sales, rebuild its brand and give a fresh look to a product line that rarely changed from season to season, the company said in a court filing.

Unlike RadioShack and Blockbuster, whose business model became virtually obsolete, analysts said American Apparel's restructuring could be more rewarding for the hedge funds.

"American Apparel is a unique product that can really stand out. People still want to go into stores, feel the fabric and try it on," Burt Flickinger, managing director of retail consultancy Strategic Resource Group, told Reuters on Tuesday.

He said the group could have a better chance of bouncing back from bankruptcy than peers like Wet Seal and Cache Inc, which struggled to adjust to changing spending patterns from teens.

The retailer said it will keep its California manufacturing base, which could help it get new products into U.S. shops before the December holiday season and compete with fast-fashion brands such as H&M and Inditex's Zara.

The company, with $600 million in net sales in 2014, has 8,500 employees worldwide, nearly half of them in Los Angeles.

Shares in American Apparel, with a $20.5 million market value, were suspended from trading on Tuesday ahead of their delisting from NYSE MKT.

The American Apparel case is in U.S. Bankruptcy Court, District of Delaware, Case No: 15-12055

(Reporting by Tracy Rucinski; Editing by David Gregorio)