Actually, after 20 further minutes of searching the town, I found a small girl hiding under some stairs. This still leaves me confused over why killing the chicken removed my bounties. So good news and bad.
Ah well that explains everything...the answer is quite simple really. Its quite obvious that this cunning little chicken was in the midst of stealing large quantities of grain from a nearby shed when you wandered by illegally helping yourself to everything else the town had to offer. The criminal coq --- startled by your sudden appearance, saw the perfect oppurtunity to pin his petty theft on you, and being a master of illusion as this feathered fiend was, he took control of a young Nord girl's mind as she played carelessly down by the river. In a state of 'fowl' possession the little girl was commanded into the shadows near your location and forced to cry out her accusing remark -- never actually witnessing the crime herself. Having served her purpose, the renegade rooster relinquished his 'fowl' grip on the girl, leaving her shocked, sobbing and cowering under the flight of stairs where you later found her. Meanwhile, the devious bird; feeling quite proud of the panic he had caused you, strutted about clucking and laughing, while you tried to figure out what the hell was going on.