Yes, you normally can choose between PCM or Bitstream for both DD and DTS. If your receiver can decode both, then set them both to bit stream. If it can not, set them to PCM.
That said, most any receiver purchase in the last 4 to 5 years should have both DD and DTS, so bitsream is the correct setting for both.
As for 5.1 vs. 7.1, DD is a discrete 5.1 channel format, as is DTS. However, both formats have a 6. 1 equivalent. DD has DD EX, where a 6th back channel is matrixed between the two rear channels. DTS has a matrixed format as well DTS ES, and a discrete 6.1 format DTS EX (IIRC).
Your rig should allow you to choose which formats to use. For normal DD/DTS, the two back surrounds would by off, but the side surrounds would be active. If you engage DD EX, or DTS ES/EX, then the rears should come on, but not at the expense of the side surrounds.
The only time that the sound would collapse to the rear backs would be for older soundtracks that were originally Pro Logic (which had mono surrounds). Newer soundtracks with discrete surrounds would play fine through all rear channels.
One more note: Some DD EX titles (Star Wars for example) are improperly flagged, and thus do not signal your receiver to activate the rear back channels. For those, you need to manually invoke DD EX.
This does not seem to be an issue with DTS ES/EX, which always seem to be properly flagged (at least with the titles I own).
BGL