How do I remodel an outdated fireplace and arrange furniture / TV in our family room?

Options we've thought of include:

1) Remove brick wall, put up dry wall and add a nice fireplace surround and mantel.

2) Add custom built in's on either side of fireplace and bring down mantel. Concern given our budget ($5k - $8k) is we'd have to put up the built in's in-front of the brick rather than removing the brick facade. This will make the fireplace look inverted and don't like the look of similar images I've seen, example here:

We use the gas fireplace frequently in the winter. We are also planning to create a knee wall on the wall shared by the breakfast room and family room to open up the living space.