Recycling polyolefins remains a significant challenge in advancing polymer sustainability due to their chemical inertness and inherent immiscibility in mixed polymer systems. In this study, a circular strategy is presented in which degraded polypropylene (PP) is transformed into a functional compatibilizer for polypropylene/polyethylene (PP/PE) blends, providing a value-added approach to polyolefin upcycling. Successive melt extrusion of PP in the presence of montmorillonite (MMT) and metal-modified MMT promoted extensive chain scission and oxidative degradation, generating oxygen-rich, low-molecular-weight fragments. Thermal analysis using TGA and DSC highlighted the efficiency of multiple processing cycles in modifying the polymer structure, and also highlighted the role of MMT as a stabilizing agent. The degraded fragments were subsequently recovered via solvent extraction, and detailed characterization using FTIR, NMR, TGA, and GC–MS confirmed the presence of carbonyl, hydroxyl, and ester functional groups. These functionalized oligomeric fragments were evaluated as compatibilizers in PP/PE blends, demonstrating their ability to improve interfacial adhesion and dispersion, thereby linking controlled polymer degradation to the creation of functional additives. Overall, this work establishes a closed-loop upcycling pathway in which the by-products of PP degradation are valorized as compatibilizers, offering a sustainable approach for the management of polyolefin waste and contributing to the development of circular polymer materials.