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I just did this yesterday. When your phone comes back up after you default it, it will be just like when you first bought it. It will ask you to log in to your Google account and then it will start syncing your contacts.
Originally Posted by mprobert
Two other things to consider:
1. Sync your phone with App Brain so that when your phone comes back up, it is very easy to re-install your third-party apps. This was a HUGE time saver for me.
2. If you want to keep your SMS messages, download SMS Backup & Restore (free in the market). This will backup all of your SMS (not MMS) to your SD card and then you can restore them once your phone comes back up.