They will then be starting with a clean slate, with only the really valuable assets (the brands, mostly), and none of the baggage of old contracts and agreements.
Of course, another company might buy up those assets, since bankruptcy sales have outside oversight (to some degree), and thwart those plans. But, I'm confident those plans are underway, and would be surprised if it doesn't turn out with some of old management heading up the new company that begins producing Twinkies again.
If you can start from scratch and lease/purchase/hire what you need under new terms then it is an existence proof that the union had priced itself out of the market (i.e. there were other workers completely willing to accept the new terms). This is true whether the new management is truely a new group of people or simply a new legal entity for the old group of people.
It's true that there's often a disconnect in how much unions demand and how much the rest of the labor market demands, and it can lead to businesses preferring to hire in non-union areas (making areas with strong unions suffer economically). I'm not entirely convinced that's the best outcome for everyone (everyone in the city, state, country, world), since it leads to employers holding a disproportionate amount of the power (the corporation becomes the only organized, powerful, force in the negotiation), and employee compensation consistently being pushed downward, while executive compensation often skyrockets. I'm pretty libertarian, so I like market forces, but I think we're seeing evidence that not having some kind of force that opposes corporations having disproportionate power leads to stagnant wages (not keeping pace with inflation), more reliance on government services (when an employer doesn't pay for any benefits, the employees end up relying on various government services for those necessities like healthcare), and a bigger disparity in power. Corporations and states end up having all the power, while individuals (those not lucky enough to have money and influence) end up getting pushed around.
If executives are receiving massive pay increases (which is what happened at Hostess; 300% pay raise, apparently), while the ship is sinking, I'd say there's a lot more than mere market forces at work. I think greed plays a role, too. In a company with some folks making millions, while others are asking for a $1/hour raise, I'm not sure I'm willing to call it merely market forces at work.
Intertwining employment with health insurance has been a big mistake in my mind. Not only does it distort the insurance market in many ways, but it also radically affects job mobility as it artificially binds employment and heath care decisions creating constraints that wouldn't otherwise exist.