The current waste management systems are struggling to optimally handle biodegradable plastics (BDPs) and are facing numerous challenges; one of which is the consumer confusion about how to best source-segregate BDPs. Based on an environmental life-cycle assessment, this study investigated the consequences of collecting BDPs in one of three waste streams (packaging waste, biowaste, and residual waste) in Austria. Collecting BDPs as (i) packaging waste resulted in incineration (SP1) or mechanical recycling (SP2), (ii) biowaste resulted in composting (SB1) or anaerobic digestion (AD) (SB2), and (iii) residual waste in incineration (SR1). SP2 performed best in most of the 16 investigated impact categories (ICs). Three scenario analyses demonstrated that (i) utilisation of BDPs as an alternative fuel for process heat substitution yielded more environmental benefits than incineration in SP1 and SP2, (ii) adding a material recovery facility (MRF) with AD increased the environmental load for SB2, while (iii) the energy scenario with zero electricity imports plus heat from biomass performed best for most alternative pathways across the 16 ICs. Eight technology parameters (out of 97) were identified as most relevant for the results based on data quality, sensitivity ratio, and analytical uncertainty; they were related to waste incineration, MRF, recycling facility, compost- and AD processes. Overall, mechanical recycling emerged as the most favourable option which is aligned with the waste-hierarchy mentioned in the European Union Waste Framework Directive. However, effective mechanical recycling of BDPs requires (i) a ‘sufficient’ waste amount, (ii) a market for recyclates, and (iii) relevant mechanical recycling infrastructure.