We present a new model and extensive computations that explain the dramatic remodelling undergone by a fibrous collagen extracellular matrix (ECM), when subjected to contractile mechanical forces from embedded cells or cell clusters. This remodelling creates complex patterns, comprising multiple narrow localised bands of severe densification and fiber alignment, extending far into the ECM, often joining distant cells or cell clusters (such as tumours). Most previous models cannot capture this behaviour, as they assume stable mechanical fiber response with stress an increasing function of fiber stretch, and a restriction to small displacements. Our fully nonlinear network model distinguishes between two types of single-fiber nonlinearity: fibers that undergo stable (supercritical) buckling (as in previous work) versus fibers that suffer unstable (subcritical) buckling collapse. The model allows unrestricted, arbitrarily large displacements (geometric nonlinearity). Our assumptions on single-fiber instability are supported by recent simulations and experiments on buckling of individual beams with a hierarchical microstructure, such as collagen fibers. We use simple scenarios to illustrate, for the first time, two distinct compressive-instability mechanisms at work in our model: unstable buckling collapse of single fibers, and snap-through of multiple-fiber groups. The latter is possible even when single fibers are stable. Through simulations of large fiber networks, we show how these instabilities lead to spatially extended patterns of densification, fiber alignment and ECM remodelling induced by cell contraction. Our model is simple, but describes a very complex, multi-stable energy landscape, using sophisticated numerical optimisation methods that overcome the difficulties caused by instabilities in large systems. Our work opens up new ways of understanding the unique biomechanics of fibrous-network ECM, by fully accounting for nonlinearity and associated loss of stability in fiber networks. Our results provide new insights on tumour invasion and metastasis.