Starburp,
That wiring setup seems... Convoluted. First of all, if you want surround processing, you have to do it during the digital stage (or have a different analog connection for each direction, think an RCA cable but instead of two plugs you have 5 or 7). Connecting a 3.5mm cable from your AVR to the DSS wouldn't improve anything.
If you feel like using LPCM and HDMI, you'll need either
A.) a receiver with headphone surround processing built-in, like my Yamaha or an older Marantz AVR with Dolby Headphone. In this case you'd connect the AVR's headphone output and game console's chat output to your mixer, your mixer to an amp, and amp to your Q701. Fun?
B.) Buy a surround processor with HDMI, the only one I can think of is the
Smyth Realizer A8. Apparently, it's the 8th man made wonder of the world. Also, Smyth is releasing a newer A16 unit in the near future, street price expected around $1500.
C.) give up on LPCM, and get a surround processor with a better DAC (that still uses SPDIF/optical). The two units I can think of are the
Beyerdynamic Headzone and the
Creative X7. The upside of these is you get an all-in-one without need for your Behringer or Schiit.
Let's get back to the core reason for your question: optical vs LPCM. Why do you want a new option? Better perceived quality. I can tell you now that Optical still has untapped quality potential above what you're getting from your current setup, and that Optical isn't the weakest part of your audio chain (and hooking up an AVR like you described would probably net you a WORSE sound than you already have). Improvements in DAC, amp, and headphones will make a greater impact than LPCM over HDMI.
I have had a DSS for a year, an AVR (Yamaha) with LPCM and built-in headphone surround processing, a Creative X7, and a ton of other processors and setups over the years, and I can tell you from personal long-term testing that an X7 + Q701 > AVR + Q701. I have a friend who uses a DSS2 + Cavalli Liquid Carbon ($800 amp) + Sennheiser HD800 ($1400 headphone), and his setup still was able to eke out better performance than his older setup (recon3D + garage1214 tube amp + Q701).
I haven't tried the Headzone or Smyth YET, but, again, optical isn't the limiting factor of your setup.