I think the best capability for you to use would be the ability to enable/disable joints. If you put a deactivated weld joint between your two planets and then activate it when they get close, you can model an inelastic collision.
If you want there to be some energy loss as the two planets collide, you can apply some position-based damping to the two planets.
For deformation, you could consider using the variable mass blocks. I don't think the flexible bodies are what you want, as those are elastic bodies and will store energy as they are deformed.
--Steve
