Embattled commercial lender CIT Group Inc. (CIT) continues to search for a line of credit to stave off possible bankruptcy, but isn't actively considering a merger at the moment, people familiar with the company and its creditors said Tuesday.

CIT has to submit a restructuring plan that is acceptable to a majority of its bondholder steering committee by Oct. 1.

The company warned in July it may be forced to file for bankruptcy protection, after it failed to get additional aid from government officials for any form of rescue. The company secured a $3 billion rescue loan from a group of its six largest bondholders, including Pacific Investment Management Co., Oaktree Capital, Silver Point Capital, and Centerbridge Partners, at the end of July.

Shares gained 31.7% to $2.20 on the New York Stock Exchange on Tuesday after a report in the New York Post of a possible merger proposal of CIT and privately held mortgage lender IndyMac Federal Bank.

Hedge-fund manager John Paulson, who owns CIT bonds and was part of the private-equity and hedge-fund consortium that bought IndyMac earlier this year, was said to have informally proposed a merger between the two, according to the Post report.

A person close to Paulson told Dow Jones Newswires later Tuesday that the report of the Paulson proposal was "way off base." A New York Post editor didn't return a call seeking comment.

IndyMac is overseen by the Federal Deposit Insurance Corp., a situation that would make such a merger difficult, the person said. The person wouldn't comment further on Paulson's feelings about CIT or IndyMac.

Standard & Poor's analyst Matthew Albrecht said a Paulson plan "would be one of many options discussed among CIT's creditors to help the company. We view positively any ideas that might provide a catalyst for CIT's creditors to restructure the company's considerable debt."

CIT's near-term bonds continued a recent rally, with the 5.6% bonds due April 2011 up three points at 72 cents Tuesday, according to online trading platform MarketAxess. That is 11.4 points higher for the month. The near-term bonds have made significant gains this month ahead of CIT's restructuring plan deadline, and have been buoyed this week on speculation that the company is in talks with Citigroup Inc. (C) and Bank Of America Corp. (BAC) to refinance its $3 billion rescue loan with $8 billion to $10 billion of new secured debt.

In a note to clients Monday, CreditSights analysts said that while they cannot confirm the validity of the speculation, repaying the $3 billion loan with a new financing would get "management out from under the thumb of the steering committee." It also helps to preserve the flexibility of CIT by keeping it alive longer, the analysts said.

Two people close to discussions about CIT's restructuring plan said any loan would most likely total close to $6 billion. They said the firm would either look to increase the size of the existing $3 billion loan or refinance it into a larger facility. This extra debt would ensure that the company has enough cash to see it through a recapitalization of its balance sheet, one of the people said. Any secured debt is likely to come from the steering committee of bondholders, as well as banks, this person said, but added that banks haven't not yet been chosen.

Richard Lee, managing director of fixed-income trading at Wall Street Access, a broker-dealer in New York, still isn't ruling out bankruptcy.

"CIT's near-term liquidity would improve" with this new debt, "but it would layer $5 billion to $7 billion of secured debt ahead of the unsecured public bonds and would significantly lower recovery rates if the end game is bankruptcy," he said.

Any restructuring is expected to include debt-for-equity swaps as well as offers to extend debt maturities. The exchange offers are likely to carry the option of a pre-packaged bankruptcy if not enough bondholders participate in the exchanges.

CIT, which posted a $1.62 billion loss in the second quarter, has said previously that a restructuring may also include selling portfolios of assets or business lines.

A spokesman for CIT declined to comment. Jeanette Volpi, a spokeswoman for Citigroup, declined to comment. Bank of America Merrill Lynch didn't respond to requests for comment.

-By Joseph Checkler and Kate Haywood, Dow Jones Newswires; 212-416-2152; joseph.checkler@dowjones.com

(Joe Bel Bruno and Aparajita Saha-Bubna contributed to this report.)